Hudson - Earnings Call - Q3 2020

Transcript

Speaker 0

Good day, ladies and gentlemen, and welcome to the Hudson Technologies Third Quarter twenty twenty Earnings Call. All lines have been placed on a listen only mode. At this time, it is my pleasure to turn the floor over to your host, Jennifer Belladeau. Ma'am, the floor is yours.

Speaker 1

Thank you. Good evening and welcome to our conference call to discuss Hudson Technologies' financial results for the third quarter of twenty twenty. On the call today are Brian Coleman, 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 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 business 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.

Later in the presentation, management will refer to adjusted EBITDA, which is a non GAAP financial measure. We refer you to the company's earnings release and related eight ks filed today where this term is defined and reconciled to net income. With that, I'll turn the call over to Brian. Go ahead, Brian.

Speaker 2

Good evening and thank you for joining us. Our third quarter performance was largely in line with our expectations. We saw continued pressure related to the demand as many public venues remained either entirely closed or open for only a limited usage during the pandemic. Not to oversimplify the issue, but buildings that have no people or activities on a daily basis have a limited need for comfort cooling. So end market demand for refrigerants remained weak through the third quarter.

We continue to experience volume declines when compared to last year as a result of the weakened demand. Pricing for R-twenty two was stable with some modest increases when compared to the second quarter of this year, while HSCs were more price competitive in the quarter when compared to the second quarter of this year, likely driven by the overall reduction in demand. Despite this challenging environment, we're pleased to achieve increased operating income and breakeven profitability in the third quarter. Our financial position and liquidity strengthened during the quarter with total liquidity at 09/30/2020 of approximately $42,000,000 which includes cash and revolver availability. In addition, during the quarter, we fully paid down our revolver while increasing our cash balance to $9,200,000 We're very pleased to have made this progress in the quarter despite the challenging environment.

In the face of this economic environment, we like many in the refrigerant industry remain focused on controlling what we can do to effectively navigate through this pandemic. As you know, we look at the selling season as a nine month season in which we may have certain quarters that are stronger than others. Unfortunately, this year, the majority of our selling season coincided with shutdowns. And obviously we felt the impact of the unpredictable and adverse circumstances that have characterized the year thus far. Historically, the fourth quarter is typically our quietest quarter, one of which we plan our operational strategy to anticipate and meet the needs of our customers for the following year's cooling season.

We are optimistic that 2021 will bring more consistent reopenings for businesses and schools, and we are planning accordingly so that Hudson is well positioned to help meet potential demand as more cooling systems are turned back on. To be clear, we view the constrained demand for refrigerants in 2020 as an anomaly. Refrigeration and comfort cooling systems are a necessity and the installed base of these systems has continued to grow. We are a leading source of all types of refrigerant from legacy products like CFCs and HCFCs to the current HFCs and beyond to the next generation HFOs. Additionally, we have a solid base of long standing customers and are well positioned at two key points in the supply chain.

So while this is a fluid environment, we're optimistic about future opportunities. With that in mind, during the quarter, we strengthened our organization with an industry veteran, Ken Gaglione, as Vice President of Operations. Ken was most recently the Global Marketing Director for aftermarket refrigerants at Honeywell, where he was responsible for the profitable growth of global aftermarket business, including project management, demand planning, pricing strategy, process efficiency and new product commercialization. With his thirty years of experience in strategic planning, marketing, product management, he's already become a valuable resource as we shape the company's future. Sustainability is a key initiative for the nation and for the world.

And moving forward, we remain confident that the marketplace will likely adopt a phase out of HFC refrigerants as the development and use of more environmentally friendly products continues. As we've mentioned before, the American Innovation and Manufacturing Act of 2019 or the AIM Act, which proposes to phase down the HSC production over the next fifteen years is pending further consideration by the House and Senate. The bill has enjoyed bipartisan support and if enacted, would put forth the regulated phase down of HFCs that will lead to the establishment of an allocation system similar to what we saw with the phase down of R-twenty two. We would then expect to see a tightening in the supply demand balance for HFC refrigerants likely resulting in HFC price increases. This represents a tremendous long term growth opportunity and we expect HFC sales will continue to grow as a percentage of our revenues as refrigeration systems are upgraded and new construction continues.

We're also acting innovatively to drive future sustainability. And following the close of the quarter, we announced our partnership with BlueSource, the nation's leading carbon offset developer and retailer to reduce greenhouse gas emissions associated with HFCs. Through this partnership, Hudson and BlueSource will work together initiating carbon projects to develop and market high quality voluntary carbon offsets resulting for the reclamation of HSC refrigerants across the country using the American Carbon Registry's Certified Reclaimed HFC Refrigerants Protocol or the ACR Protocol. To give you a real world example, if there was a release of refrigerant from your central air conditioning system, that would cause a severe adverse impact to the environment. To give you some further context, the global warming potential of two pounds of refrigerant 410A has the same greenhouse impact as two tons of carbon dioxide, which is the equivalent of running your car for about six months.

As such, the HSC class refrigerants can be very harmful when vented into the environment. On the flip side, recovery and reclamation provide a significant environmental benefit and that's why we're excited by the growth in the voluntary markets and HSC reclamation. The ACR protocol is extremely important and has been executed in advance of any regulatory requirements. These projects encourage the acceleration of GHG emission reductions and have been identified as one of the top solutions to address global climate change. Hudson was founded on a commitment to sustainability and we are excited to team with BlueSource to lead the way in driving growth in HSC refrigerant reclamation market and advance our contributions to the circular economy.

We believe we are well positioned to leverage opportunities as the country continues to open and cooling systems are reengaged. We're optimistic about the long term opportunity in front of us and focused on growing our leadership position in the refrigeration and reclamation space. Now I'll turn the call over

Speaker 3

to Nat to review the financials. Go ahead, Nat. Thank you, Brian. For the third quarter ended 09/30/2020, Hudson recorded revenues of $41,500,000 a decrease of 9% as compared to $45,600,000 in the comparable 2019 period, primarily due to a decline in volume as the continued COVID-nineteen pandemic and the associated closures of public venues adversely impacted our end markets and the overall demand for refrigerants. Gross margin for the third quarter of twenty twenty improved to 22 compared to 17% in the third quarter of twenty nineteen.

Although the gross margin has improved from 2019, the 2020 gross margins were slightly lower than expected due to increased HFC sales compared to other refrigerants in a slightly more price competitive market likely due to the decrease in demand associated with the economy. SG and A for the third quarter of twenty twenty was $6,200,000 a $2,100,000 decrease compared to $8,300,000 in the third quarter of twenty nineteen, mainly due to reduced professional fees and payroll costs. We reported operating income of $2,100,000 in the third quarter of twenty twenty compared to an operating loss of $1,200,000 in the third quarter of twenty nineteen. Interest expense for the third quarter of twenty twenty was 3,000,000 a decrease of $1,400,000 from the $4,400,000 reported during the third quarter of twenty nineteen, mainly due to the company paying down $16,500,000 of debt during the third quarter of twenty twenty and $15,200,000 of debt during the fourth quarter of twenty nineteen. The company recorded net income of $39,000 or breakeven earnings per basic and diluted share in the third quarter of twenty twenty compared to net income of $2,700,000 or $06 per basic and diluted share in the same period of 2019.

It is important to note that the third quarter twenty nineteen net income included other income of $8,900,000 consisting of proceeds from the working capital settlement arising from the acquisition of Aspen Refrigerants Inc, which then led to the net income of $2,700,000 last year. On an LTM basis, adjusted EBITDA at 09/30/2020 was $14,900,000 with a leverage ratio of 5.8 times, a tremendous improvement compared to LTM adjusted EBITDA of $8,500,000 and a leverage ratio of 13.8 times at September 3039. At 09/30/2020, we had approximately $42,000,000 of total availability consisting of our cash balance and revolver availability. Also as of 09/30/2020, we have fully paid off of our revolver while increasing our cash balance to $9,200,000 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. During these challenging times, we remain optimistic for the future because of our long history and experience in this industry providing essential products and services. We've created a solid platform over the years and we remain intent on building our leadership position in the refrigerant and reclamation business by leveraging our long time experience, loyal customer base, innovative technology and well established distribution to drive growth. Operator, we'll now open the call to questions. Operator?

Speaker 0

Thank you. The floor is now open for questions. If you do have a question, please press star one on your telephone keypad at this time. Questions will be taken in the order they were received. If at any time your question has been answered, you can remove yourself from the queue by pressing 1.

Again, ladies and gentlemen, if you have a question, please press star one on your telephone keypad at this time. Okay and we have a question that just came in from Craig Hoagland with Anderson and Hallum. Please state your question.

Speaker 4

Brian, could you just comment a little bit on the aftermarket or the pricing and the reclaim market for refrigerants?

Speaker 2

R-twenty two pricing was pretty strong in the third quarter. We saw some increases compared to the second quarter of this year. And we're pretty much above the $10 mark, which let's say in the first half of the season, we're in that $10 range. So we're above that now. As it relates to HFCs though, HFCs have been a little bit volatile and trending down, in the third quarter when compared to second quarter.

And probably was due to the fact that the overall demand was down and let's say, we had inventory at some of our competitors and it was a little bit price competitive through the season.

Speaker 4

And do you have a sense if stockpiles of R-twenty two have cleared out at all? Or are we still working down the virgin gas inventory?

Speaker 2

So we, believe that a majority of the stockpile was with the three large chemical producers that had 90% of the allocations. And they were Honeywell, Chemours and Arkima. And we always believed that Arkima might have had the larger of the stockpile, due to the lawsuit that occurred way back in 2013. That said, Honeywell announced that they were out of the 22 business, last season around June of last year. Chemours is acting, as if they are out, although we won't know for sure and they haven't done an announcement to that effect.

But it does appear that they may be out of '22. And that leaves Arkhama with some amount and we certainly do think they'll have some amount for the next season.

Speaker 4

Okay. All right. And can you comment on your mix between R-twenty two and HFCs?

Speaker 2

Well, for competitive reasons, we don't break out the information. But right now, HFCs in the aftermarket probably represent about 70% of the overall demand and it could be higher. So our business would likely look something similar to the overall marketplace since we touched Within the

Speaker 4

Okay. And that's the R-twenty two equipment is just aging out and being displaced?

Speaker 2

Correct. But it's really two things are happening. All new construction since around 2012 have been solely HFC systems. Now you're starting to see some HFOs go out in the marketplace. But, so they've mainly been new systems relative to either replacement of '22 or new construction, which is why you're seeing the dominant growth in HFCs.

Speaker 4

Okay. All right. Thank you.

Speaker 2

You're welcome.

Speaker 0

And it doesn't look like we have any further questions.

Speaker 2

All right. Well, thank you, operator. I'd like to thank all of our employees, particularly during these extraordinary times for their hard work and dedication. I want to again thank our longtime 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 fourth quarter results.

Have a good night, everybody.

Speaker 3

Thank you.

Speaker 0

Thank you. This concludes today's conference call. We thank you for your participation. You may disconnect your lines at this time, and have a great day.