Hudson - Earnings Call - Q1 2020
May 6, 2020
Transcript
Speaker 0
Good day, ladies and gentlemen, and welcome to the Hudson Technologies First Quarter twenty twenty Earnings Conference Call. All lines have been placed on a listen only mode and the floor will be open for your questions and comments following the presentation. At this time, it is my pleasure to turn the floor over to your host for today, Nat Krishnamurti. Please go ahead. The floor is yours.
Speaker 1
Thank you. Good evening, and sorry for the delay. Welcome to our conference call to discuss Hudson Technologies financial results for the first quarter of twenty twenty. My name is Nat Krishnamurti, CFO of Hudson Technologies. On the call with me today, we have Kevin Zugabe, Chairman and CEO 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 Hudson's most recent Form 10 ks and other subsequent SEC filings for a discussion of the principal risks and uncertainties that affect our business and our performance and of the factors that could cause our actual results to differ materially. With that, we will now turn the call over to Brian Coleman.
Speaker 2
Good evening, and thank you for joining us. Again, we apologize for the delay. Let me start by saying that COVID, nineteen has had a dramatic impact on the lives of every person, business, and industry throughout The United States, and of course, Hudson is no exception. However, Hudson operates in a critical infrastructure industry and is an essential business as defined by the United States government as we procure, process, service, and deliver refrigerants and industrial gases to the government, and refrigerants and services to wholesale and retail organizations, which serve hospitals, supermarkets, and many other industries throughout The United States. We have kept our plants operating and have been effectively running our operations while following all state and federal guidelines to keep our employees safe and healthy.
As of this date, there has been no material impact on our ability to procure or distribute our products and services. Our prior priorities throughout the pandemic have been to ensure the health and safety of our employees, to keep our products in supply, and to maintain the quality and safety of our products, to best serve our customers across all channels as they adapt to the crisis and to position ourselves to emerge strong when the crisis ends. Looking back at the February, we see that the market has stabilized. Refrigerant prices have been constant, and we're seeing some strengthening in the pricing of r twenty two. In addition, we saw an increase in the volume over the same period last year, building on increased volume we saw in 02/2019.
During the first quarter, we improved the gross margins over 2019 and believe we have an opportunity to further drive improved margins in 2020 as we replace higher priced inventory with lower priced product. We believe the customers' inventories are low, and with the elimination of r twenty two production importation in 02/2020, we expect to see a tightening in the supply of virgin r 22. We are a few weeks away from the prime selling season, so it's too early in the season to know how pricing will develop. As we proceed through 02/2020, we are concerned that the economic factors resulting from the various governmental restrictions that have been put in place as a result of COVID nineteen outbreak could have a negative impact on the demand and or price for refrigerants. The effect on refrigerant sales due to the closing of businesses combined with negative financial impact to the economy is unknown at this point.
Time will tell. This is yet another reason why we describe the sales season as a nine month season, not necessarily a quarter to quarter season. The marketplace will likely adopt a phase out of HFC refrigerants as the development and use of more environmentally friendly products continues. The American Innovation and Manufacturing Act of 02/2019, or the AIM Act, if enacted, would phase down HFC production over the next fifteen years. The AIM Act enjoys strong bipartisan support, and both the House and the Senate are expected to take up further consideration of the AIM Act when they return from their extended COVID break.
We are encouraged by the level of bipartisan support for which a bill which, if enacted, would start a regulated phase down of HFCs. We believe a phase down of HFCs will lead to the establishment of an allocation system and tightening in the supply demand balance that will likely result in increased pricing for these refrigerants. Our diverse portfolio refrigerants includes HFCs, r 22, and COC sales, And we are preparing for future demand for HFO refrigerants, which are designed ultimately to replace HFCs. HFC sales represent a growing percentage of our revenues, and with the projected installed base, we see HFCs as a tremendous long term growth opportunity for our company. We continue to replace our higher cost FIFO inventory layers with lower priced product, which we believe will drive continued improvement in our margins in 2020.
We have increased overall sales volume to our customers and have positioned the company to benefit from stabilization of industry pricing dynamics. We remain optimistic about the long term opportunity in front of us, and we believe we have a competitive advantage in the marketplace because of our long standing experience and because of three key strategic advantages. First, our strong distribution network, which puts us at two key points in the supply chain. Our ability to sell all refrigerants from legacy gases like the CFCs to today's commonly used HCFCs and HFCs, and to tomorrow's next generation HFOs, and our state of the art proprietary technology that enables us to reclaim all of these refrigerants and thereby become the producer supplier of phased out refrigerants. Now I'll turn the call over to Nat to review the financials.
Go ahead, Nat.
Speaker 1
Thank you, Brian. For the first quarter ended 03/31/2020, Hudson recorded revenues of $36,400,000 an increase of 5% compared to $34,700,000 in the comparable 2019 period, primarily due to an increase in the volume of refrigerants sold. Gross margin for the first quarter of twenty twenty was 23% compared to gross margin of 20% in the first quarter of twenty nineteen, which as Brian mentioned is primarily due to selling lower priced inventory, which continues to replace higher layer FIFO inventory from last year. We reported operating income of $400,000 in the first quarter of twenty twenty compared to $200,000 in the February. During the February, the company recorded a net loss of $2,900,000 or a loss of 7¢ per basic and diluted share as compared to a net loss of $4,000,000 or a loss of 9¢ per basic and diluted share in the same period of 02/2019.
Selling, general, and administrative expenses for the February were at $7,300,000 compared to $6,000,000 in the first quarter of twenty nineteen, mainly due to increased non recurring professional fees. The current SG and A run rate is about $7,000,000 per quarter. Interest expense for the first quarter twenty twenty was $3,300,000 a decrease of $900,000 from the $4,200,000 reported during the first quarter of twenty nineteen, mainly due to the company paying down $14,000,000 of principal term loan debt in December 2019. At 03/31/2020, we had approximately $27,000,000 of total availability, which includes our cash balance and revolver availability. Our total debt balance at 03/31/2020 was approximately $109,600,000.
On an LTM 03/31/2020 basis, the term loan leverage ratio was 11.28 times. 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 into the coming years. I will now turn the call back over to Brian.
Speaker 2
Thanks, Nat. Hudson remains a leader in the refrigerant and reclamation business with the expertise, innovative technology, and a well established distribution network necessary to drive growth. Despite the challenges encountered in the current economic conditions, there continues to be a growing demand for refrigerants and cooling systems. That combined with our ability to provide any refrigerant any place at any time and our well established customer base gives us a solid foundation for future growth of our company. Operator, we'll now open the call to questions.
Speaker 0
Thank you. We'll go first to Gerry Sweeney at ROTH Capital.
Speaker 3
Hey. Good morning, guys. Thanks for or good afternoon. I'm sorry. It's been a long day.
Thanks for taking my call. Hope you're hanging in there with this COVID issue Yeah. Personally.
Speaker 2
We are, Terry. And and just sorry for the delay. We had a a problem with the phone number. So sorry about that.
Speaker 3
No. No worries. I called the international number. That's the one I got through. So curious, just a couple of quick questions.
You commented on customer inventory being low. Just wanted to dig into that. Was that just your internal sales making calls, you know, talking to customers? And just wanna see what was the basis of the comment.
Speaker 2
Yeah. Yeah. I think in the prepared remarks, we we were talking, to r 22. But based on speaking with customers, we do believe, in general, and again, it's really from the sales calls, that, all inventories are, somewhat low.
Speaker 3
So all inventories, not just, r 22?
Speaker 2
Yeah. It seems that right now for the season, people and and maybe it's the economy, again, we're still trying to figure out how much could be impacted by the economy, versus, you know, the weather. Obviously, April's always a a cool month. So, but we think the inventory is low right now.
Speaker 3
And then, I mean, historically, well, the buying patterns have changed a little bit over time, more to what we'll call a just in time inventory. I suspect with some of those COVID economic issues we're having, I would suspect that this sort of just in time buying pattern is what you're still seeing today? Or did you have any sort of pre buy with
Speaker 2
the No. No. When you look at the results of q one twenty compared to '19, your volume is up, but again, it's still that changed behavior or pattern that we started to see in 02/2018, where people aren't pre buying anymore. And as I think you just said a few moments ago, we would agree, it's probable for some period of time that people will buy just as needed because of the uncertainty regarding the economy.
Speaker 3
Okay. And from time to time, you know, we have discussed some, I think, h r twenty two prices. Could you give us any indication as to where your the the market is today?
Speaker 2
So the last time we spoke, we would have, talked about, let's say, 10 prices. Yeah. That's the number.
Speaker 4
Yeah. When we said
Speaker 2
that, let's just say low low $10, we're seeing higher $10 prices, right now. Not not real significant increases, but definitely, increases.
Speaker 3
And, also, think on that $10 number, it was pretty I mean, there wasn't a whole lot of volume. So, you know, there was always questions of, you know, was that the true true price? I suspect volumes are higher and it's more of a consistent higher $10 that you're seeing. In other words, feel pretty confident in that price.
Speaker 2
Yeah. We feel confident in the price as of now. Again, it's still early in the season Sure. And still some uncertainty about the economy. But right now, the price seems to be stable.
Speaker 3
Okay. And then the final question is just, you know, even with COVID, pre COVID, what was the market or opportunity or how was your the ability to collect r '22? Was there enough gas coming back? Were you seeing, you know, a a good amount of volume just to keep, you know, inventories at appropriate level?
Speaker 2
Well, we still had the stockpile, of 22 that came with the Aspen acquisition. And, we said that we thought that it would sell out this year, and that's what we think is gonna happen. So reclaim, though, is a concern for the future, in that the reclaim numbers are still low relative to what we think the demand is. That possibly will mean there's gonna be shortages and then higher prices even, which in some respects may be a good thing. But we are concerned, and we are trying new things to grow reclaimed volumes.
Speaker 3
Got it. Okay. That's it for me. I I appreciate it, and, you know, good luck. And I know you guys were up there in New York in the epicenter.
So hang in there, I'll talk to soon. Yes. Thank you, Chuck.
Speaker 0
We'll go next to Ryan Sigdahl at Craig Hallum Capital.
Speaker 5
Hey, guys. This is Matt on for Ryan. Thanks for taking our questions. Just following up quickly on the answer to the last question, what are you trying to do to spur reclaim volume? Anything you can say there?
Speaker 2
Yeah. Not to get into too much detail, but, you know, we are initiating newer programs to newer customers. And so we we have some optimism about that, and we put, a fair amount of sales and marketing support behind that.
Speaker 5
Great. On the inventory from the Airgas acquisition, I think last quarter you had talked about hopefully kind of getting through that by the end of Q2. Is that still kind of the estimated timeline? And then do you think that margins can kind of improve from 23% in Q1, improve from there kind of in the back half of the year?
Speaker 2
Yes. So, we believe that we'll sell through the higher priced, inventory, by the end of Q2. And yes, we do believe there'll be improved margins, in the back half of the year as a result of that.
Speaker 5
Great. And then just last one for me, and I'll jump back in the queue. Obviously, with COVID nineteen, you had alluded to, obviously, the potential impact on demand. Is there anything you're seeing, even just today or in the last several weeks that would indicate that customers could be, pulling back on purchases or anything boots on the ground level, on that?
Speaker 4
I'd I'd say no at this point. It's early in the season. It's still cool. We're not in the the heart of the season yet. Again, that's still a big unknown for us, and they could have a big impact, a small impact.
We really can't tell. Any you know, anywhere products or people are being kept cold, there's probably refrigeration and air conditioning, so there's a need for refrigerants. When you see buildings being shut down right now and people working from home, that's an effect. It'll be an effect on on comfort cooling, on office buildings. It could even be the residential have an effect where more people are working from home.
It could go the other way, where hey, I've got my system fixed at home because I have to work from here now, not in the office. So it's difficult to say what the exact effect's gonna be. But we do know where people migrate, where they are. They'll need air conditioning and refrigeration. It's just different going into this year.
We're seeing a little of that, but it's, again, still too early to tell because we're not in the heat of the season.
Speaker 5
Got you. Thanks, guys, good luck for the rest of the quarter. Thanks.
Speaker 4
Thank you.
Speaker 0
That's all I have signaled so far, but just a final reminder, it was star one if you had a question or comments. And with no other questions holding, I'll turn the conference back to management for any additional or closing comments.
Speaker 2
Thank you, operator. Again, we apologize for the late start. But I'd like to thank all of our employees, particularly those particularly during these extraordinary times for their hard work and dedication. And I wanna again thank our long term, long time shareholders and those that recently joined us for their support. Thank you everyone for participating in today's conference call, and we look forward to speaking with you after the second quarter results.
Have a good night, everybody.
Speaker 0
Ladies and gentlemen, that will conclude today's call. We thank you for your participation. You may disconnect at this time, and have a great day.