Hudson Technologies, Inc. (HDSN) Q4 2019 Earnings Report, Transcript and Summary

Greetings. Welcome to the Hudson Technologies Fourth 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. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Nat Krishnamurti, CFO. Mr. Krishnamurti, you may begin.

Thank you. Good evening, and welcome to our conference call to discuss Hudson Technologies financial results for the fourth quarter of 2019. My name is Nat Krishnamurti, CFO of Hudson Technologies. On the call with me today are Kevin Zugibe, Chairman and Chief Executive Officer; and Brian Coleman, President and Chief Operating Officer of Hudson. 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 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. With that, I'll now turn the call over to Kevin.

Thank you, Nat. 2019 was another challenging year for Hudson and for the entire industry as we saw further price erosion from nearly all refrigerants during the 2019 selling season as compared to 2018. However, entering 2020, we have seen some encouraging signs in the industry as to pricing and are currently seeing R-22 pricing above $10 a pound. While it's difficult to assess where pricing will go during the 2020 selling season, some facts are clearly in our favor. First, no more virgin production or importation of R-22 is allowed and secondly one of the big three producers is out of R-22 supply. Coupled with the increased R-22 pricing, we were very optimistic about pricing and demand for R-22 going forward. Before going further, we were very pleased to have recently announced that we entered into a new revolving credit facility with Wells Fargo and successfully amended our existing term loan facility. As a result of that amendment, the financial covenant defaults at June 30th and September 30, 2019 had been waived and the company is now in compliance with our Term Loan Credit and Security Agreement. While the 2018 and 2019 defaults were technical in nature, we were timely in all of our financial obligations. And since the acquisition of Aspen, we have paid down $68 million, or 40% of the total debt we acquired under some of the most adverse market conditions this industry has ever experienced. The amendment reset the maximum total leverage ratio of financial covenant through December 31, 2021, reset the minimum liquidity requirement; and added a minimum LTM adjusted EBITDA covenant. With the new revolving credit facility and the amendment of the term loan in place, we believe we have the financial flexibility and liquidity that drive improved operating performance as we move through 2020 and beyond. As part of that process, we have a new Chief Restructuring Officer and two new members of our board of directors, who provide further depth and experience in maintaining financial stability and strength. The amendment process was lengthy and we appreciate the patience and support shown by our shareholders while we completed that process. In spite of the conditions we encountered throughout the year, we generated $34 million of cash flow from operations, which included $15.2 million of cash interest expense, and paid down $31 million of debt, including $14 million of long term debt in the fourth quarter of 2019. As of December 31, 2019, the Company had over $22 million of availability through its new revolving facility. As many of you know, 2019 was the final year of virgin R-22 production and starting on January 1, 2020 no new virgin productions permitted. There remains a large installed base of R-22 systems in the U.S. demand for comfort cooling and food refrigeration is strong. And given the expense associated with replacing or upgrading a refrigeration or cooling system, we expect demand for R-22 to continue through 2030 and beyond. With the elimination of virgin production and importation in 2020, we expect to see a shortfall in the supply of R-22, and we believe our ability to reclaim and resell R-22 creates a tremendous opportunity to position Hudson to address the anticipated supply shortage and become the leading producer of R-22. Since our last call in November, 2019 the price of R-22 has stabilized with prices consistently above $10 a pound and we're beginning to see some strength in the price of R-22 as we enter 2020. With the prime 2020 selling season still 30 to 60 days away, it's still early in the 2020 season to know how pricing will develop. Hudson continues to believe that with the removal of virgin supply, the R-22 market will begin to behave in a true supply demand manner. Additionally, the industry will likely continue to phase out HFC refrigerants as a development and use of more environmentally friendly products continues. In this regard, there is a growing bipartisan support for the American Innovation and Manufacturing act of 2019 or the AIM act. which if enacted would phase down HFC production. As of today, in the Senate virgin has 32 co-sponsors, half Republican, half Democrat, and in the house virgin has 24 co-sponsors again, half Republican and half Democrat. We’re encouraged by the level of bipartisan support for a bill, which if enacted would start a regulated phase out of HFCs. Ultimately we expect to see the establishment of an allocation system for HFCs as well as a tightening in the supply demand balance that will likely result in increased pricing. For the last two seasons, the entire industry has seen a significant decline in pricing on almost all refrigerants, which brings us to where we are today. As we are steadily selling off our higher cost FIFO inventory layers, we have increased overall sales volume to our customers and it positions the company to benefit from the eventual stabilization of our industry pricing dynamics. 2019 was another challenging year, but as evidenced by our increased sales volume, we remain optimistic about our long range prospects and focused on growing our market share and leadership position. We can't control pricing changes in demand levels, but we can implement strategies such as heightening our market efforts expanding our portfolio of products and services to appeal to a broader customer base, managing our inventory and reducing expenses. Let me point out that 2020 may come with additional challenge due to the coronavirus. While it's too early to tell, the possibility exists that there could be a refrigerant supply shortages due to the fact that there is significant HFC capacity in China that has supported the world's demand for HFCs. Any possible lengthy disruption n HFC production and distribution could cause supply chain shortages. For the moment, we're not seeing signs of material disruptions, but as the weather becomes warmer, particularly in the second quarter of this year, there could be supply disruptions. We have a vast network of domestic suppliers and the ability to reclaim all HFCs. As a result, we believe we should be able to meet our customers' demands. 2019 was a difficult year. It was also a year where we saw a growth in our sales volume, reduction in cost and improvement in margins as we progressed through the year. We remained focused on meeting the changing needs of our customers and on remaining agile in the face of fluid market dynamics. We have the people, the processes, the technology and the distribution network to leverage and grow our leadership position. Now I'll turn the call over to Nat to review the financials. Go ahead, Nat.

Thank you, Kevin. For the fourth quarter ended December 31, 2019, Hudson recorded revenues of $25.8 million, slightly higher than revenues of $25.7 million in the comparable 2018 period. Gross margin for the fourth quarter was 18.5%, an increase of 6.5% compared to 12% margin in the fourth quarter of 2018. As Kevin mentioned, during 2019, we saw an increase in the number of pounds of certain refrigerants sold, offset by a reduction in pricing. During the fourth quarter of 2019, the company recorded a net loss of $10.8 million or a loss of $0.25 per basic and diluted share as compared to a net loss of $8.1 million or a loss of $0.19 and per basic and diluted share in the same period of 2018. Approximately $1.9 million of this variance relates to higher interest expense, mainly related to the write-off of deferred financing costs from our previous revolving facility, which was replaced in December 2019. In addition, during the fourth quarter of 2019, the company incurred additional and nonrecurring lender-related fees and expenses related to the closure of a facility. Looking at full year 2019. Hudson reported revenues of $162.1 million, a decrease of 2.7% compared to $166.5 million in 2018. The decrease in revenue was primarily due to further pricing correction in 2019, partially offset by higher refrigerant sales volume and higher revenue from our DLA contract. The company recorded a net loss for 2019 of $25.9 million or a loss of $0.61 per basic and diluted share, which included inventory adjustments totaling approximately $9.2 million. And nonrecurring expense of $3.6 million, mainly consisting of lender-related fees and shutting down a facility, as described earlier. This compares to a net loss of $55.7 million or $1.31 per basic and diluted share in 2018. Full year 2019 net loss included approximately $8.9 million of other income relating to the resolution of the company's working capital adjustment claim against Airgas, Inc., arising out of the 2017 acquisition of Airgas-Refrigerants, Inc. now ASPEN Refrigerants, Inc. Full year 2018 net loss included inventory adjustments totaling approximately $35.9 million and non-recurring expense of $6.1 million mainly consisting of integration expenses relating to the acquisition of Aspen and lender related fees from the previous amendment. As we previously announced during the quarter, we secured a new revolving credit facility with Wells Fargo and a definitive amendment to our term loan credit facility. For the term loan, the amendment wave financial covenant default at June 30 and September 30, 2019 and amended the term loan credit and security agreement to reset the maximum total leverage ratio financial covenant through December 31, 2021, reset the minimum liquidity requirement and added a minimum LTM adjusted EBITDA covenant. At December 31, 2020, the term loan leverage ratio is set at approximately 8.9 times, which is derived from slight increases in revenues over 2019 mainly as a result of expected higher volumes and prices in 2020 when compared to 2019. We are very pleased with this new revolving credit facility and the new amendment to our term loan facility. We have strong liquidity and these new facilities provide us with the solid financial platform and flexibility as we look into the coming years. At the close of 2019, despite the challenging market conditions, we generated approximately $34 million in positive operating cash flow. Additionally, we paid down approximately $31 million of debt and add approximately $22 million of availability under our revolving facility at December 31, 2019. I will now turn the call back over to Kevin.

Thanks, Nat. Hudson remains a leader in the refrigerant reclamation business with the expertise innovative technology in a well-established distribution network to drive continued growth. With the addition of the significant experience and strength of our Aspen team, we’re focused on meeting exceeding customer expectations by providing any refrigerant, any place at any time as we work to further increase our market share. Operator, we’ll now open the call to questions.

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Ryan Sigdahl, Craig-Hallum Capital Group. Please proceed with your question.

Hey, guys. Thanks for taking my questions. HFC volumes up in a challenging year in 2019, are you willing to comment directionally if both reclaim and virgin volumes were up.

When we’re selling refrigerants, there is no distinction between reclaim and virgin gas. And when we talk about volume increases, we’re talking about all refrigerants, whether it be 22 or HFCs and even we still sell small amount of CFCs. But if you want it to understand the reclaim market itself, we don’t have the 2020 data industry wide, but the reclaim market really still hasn’t grown based on the industry data as reported to the EPA through 2019. We through these periods have continued to maintain approximately 35% market share on the 22 in all refrigerants. We think that continuing for the 20 year, but we won’t get the final EPA numbers until probably sometime in the spring.

Great. Then if you look at inventory, where it’s at here at the end of December and you enter 2020. Do you think we’re at a stable level or is there more opportunity to rationalize there?

We think there’s an opportunity to rationalize a small level, not as great as we might’ve seen the past couple of years, because we still have some high priced inventory coming from the Aspen acquisition. We do expect to be out of all that high priced inventory through the second quarter of this year. But what we also don’t know at the moment is what may happen with our 22 pricing and typically our 22 pricing does go up, then we will be paying more for the reclaim gas than what we paid for last year. So it’s difficult to say where we’ll end up. There’s a chance that inventory can be down a little bit, but there’s a chance that this is going to be approximately the right number.

And then maybe if we just assume stable working capital and inventory, do you expect to generate free cash flow this year and if you’re able and willing, are you able to kind of quantify a ballpark range?

Yes, we should generate positive cash flow this year. But we’re not going to quote a number at this time.

We are expecting to continue to pay down debt. There’s restrictions, limitations on how much term debt we can pay down, although, we did increase the amortization slightly from where it was previous relative to this amendment. But typically we are seeing the ABL come down and more availability build in seasons with positive results.

And then last question for me and then I’ll hop back in the queue. You mentioned R-22 above $10. Have you – is the price of R-22 strengthened over the last few months or is this kind of holding the increase that the large allocators took in September?

Probably after the increase, we talked about one producer really raising the price, but that really was a signal that they’re out of the market. We’ve seen increases, let’s say slow incremental increases to over $10 now, which we wouldn’t have seen that necessarily in Q4 of last year. But it’s still too early in the season. The warmer weather comes, then we’ll understand where the market is going.

Great. That’s it for me. I’ll hop back in the queue. Thanks guys.

Our next question is from Gerry Sweeney, ROTH Capital. Please proceed with your question.

Hey, good afternoon, guys. Thanks for taking my calls.

Hello, Gerry.

A bunch of my questions were asked on the R-22 side. But I suspect we’re going to most likely stick with this just in time sort of inventory that we’ve seen in the last couple of years and not necessarily have much of a preseason buying opportunities? Is that a fair way looking at the market today?

Yes. I’d say, still is. Yes.

Okay. And then on that pricing $10, how much volume have you been seeing at those levels? I’m not expecting a lot, but just curious as to if you could quantify it.

Again, it’s certainly not a lot, obviously, because it’s first of all the middle of the winter and there’s no real preseason pining anymore. So since that’s the case, obviously it’s – we’re not hitting the season to where you’re going to see the significant volume. But it’s enough volume, obviously. It’s in line with what we thought would be fine.

Okay. Got it. And then, when should we see sort of normal – sort of buying began? I mean, obviously you said a couple of years ago, we’d start seeing it by now. But is it mid April or early May just if you could remind me?

When the weather gets warm, it’ll build in the south and the central part of the United States. And then typically in the North and Northeast, that’s usually late May. So probably a month, you’d say May.

Okay. Got it. And then SG&A, I think you mentioned $1.9 million in write-offs, but I think you did mention in the commentary. You said there were some other fees that associated with one-time costs et cetera. Can you quantify those other one-time costs? I'm just looking to get maybe a normalized SG&A sort of target for this year?

Sure. It's – for this past quarter, it was about $1.5 million.

In addition to that $1.9 million.

That's correct.

Got it. Okay. And then, final – yes…

So just maybe to follow-up Gerry, in previous calls, we said, the SG&A is like the $28 million, $29 million number. We don't think there's going to be material changes to that. Again, from let's say, normal recurring expenses. We don't expect a lot of non-recurring costs coming forward. There's still some lender-related expenses that will be incurred. But we'll carve them out and we'll obviously let everybody know on a quarter-by-quarter basis.

Yes. That's perfect. And then finally, just the HFCs, that was a tough market for a little bit, too, any type of changes in that market you're seeing. I mean, I think, there is some trade cases and different things floating around this. Just curious on that?

Any of the cases out there right now, which you could see, there's a couple of them. There's a specific case right now filed with the ITC and Commerce on R-32 component that goes into most of the HFCs. There's a Department of Commerce case, which is an anti-circumvention case related to the towers that were put in by the ITC a few years ago. So these cases are out there. There's no real way to know how they're going to play out when they're going to be effective and so forth. As it relates to Commerce's case and anti-circumvention, that's probably the furthest one long. We may get a preliminary finding which would be subject to challenges that's the right way of saying it. Late March, April, maybe the 32 case probably is a while away as to where that's going to go. Ultimately though, we've always supported the phase out of HFC virgin production as Kevin taught earlier, whether it be Kigali or the AIM Act or some other mechanism that's likely good a better fit the company that the greatest over the longest period of time.

Got it. Thanks. That's helpful. I'll jump back in queue. Thanks.

We have reached the end of the question-and-answer session, and I will now turn the call back over to Kevin Zugibe for closing remarks.

I would like to thank our employees, our long-time shareholders and those that have recently joined for their support. Thanks, everyone, for participating in today's call. We look forward to speaking to you after the first quarter. Thanks.

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.