Good afternoon, ladies and gentlemen, and welcome to the Hudson Technologies Fourth Quarter 2020 Earnings Call. At this time, all participants have been placed on a listen-only mode. And we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, John Nesbett. Please go ahead.

Thank you. Good afternoon and welcome to our conference call to discuss Hudson Technologies' financial results for the fourth quarter and full year 2020. On the call today are Brian Coleman, President and Chief Executive Officer; and Nat Krishnamurti, Chief Financial Officer. 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 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-K 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. Okay. With that, I'll now turn the call over to Brian Coleman. Go ahead, Brian.

Good evening and thank you for joining us. We closed 2020 with our fourth quarter performance continuing to reflect the challenges that have characterized most of the year, related to the public health and economic uncertainties caused by COVID-19 pandemic, and on positive note we were seeing signs of price stability and certain price increases as we exited the year. During the fourth quarter, we saw continued decline in overall demand as many schools' businesses and other public venues remain either entirely closed or open for only limited usage due to the pandemic. As we've discussed before closures and facilities that have limited or no daily use, have reduced needs for comfort cooling. So end market demand for refrigerants continued to be weak through the close of the year, resulting in lower volumes compared to last year. The reduced volume was partially offset particularly in the fourth quarter by the higher selling prices of certain refrigerants. The fourth quarter, which falls outside of our 9-month selling season, is typically our lowest demand quarter, and that remained consistent this year. However, as we done throughout 2020, we've managed the business through SG&A cost reductions, delevering the balance sheet and reduced interest expense, all while improving our leverage ratio, as Nat will describe later. 2020 was a challenging year overall. And as it progressed, we focused on mitigating the downside of the pandemic and the residual shutdown of the U.S. economy, which impacted our entire selling season and beyond. That being said, refrigeration and comfort cooling are widely regarded as essential. And as widespread vaccination programs continue to roll out, we are optimistic that more businesses, universities and facilities will return to normal operations, and will require our products and services as they get back to business as usual. While we don't…

Thank you, Brian. For the fourth quarter ended December 31, 2020, Hudson reported revenues of $22.1 million, a decrease of 14% as compared to $25.8 million in the comparable 2019 period, primarily due to a decline in volume related to the continued closure of businesses, schools and other public venues because of the pandemic. This is partially offset by an increase in selling price of certain refrigerants, which also led to the improved gross margin of 25% for the fourth quarter of 2020 compared to 19% in the fourth quarter of 2019. SG&A for the fourth quarter of 2020 was $6.5 million, a $2.4 million decrease compared to $8.9 million in the fourth quarter of 2019, mainly due to reduced professional fees and payroll costs. Our operating loss declined from $4.8 million in the fourth quarter of 2019 to $1.7 million in the fourth quarter of 2020. To continue with the cost savings, interest expense for the fourth quarter of 2020 was $2.9 million, a decrease of $3.1 million from the $6 million reported during the fourth quarter of 2019, mainly due to the company paying down $15.2 million of debt during the fourth quarter of 2019 and $15.0 million of debt during 2020. The company recorded a net loss of $4.7 million or a loss of $0.11 per basic and diluted share in the fourth quarter of 2020 compared to a net loss of $10.8 million or $0.25 per basic and diluted share in the same period of 2019. Looking at full year 2020, Hudson reported revenues of $147.6 million, a decrease of 9% compared to $162.1 million in 2019. The decrease in revenue was primarily due to decreased volume related to the pandemic-driven closures detailed earlier. The company recorded a net loss of $5.2 million, or a loss of $0.12 per basic and diluted share for full year 2020 compared to a net loss of $25.9 million or a loss of $0.61 per basic and diluted share in full year 2019. Full year 2019 included non-cash inventory adjustments totaling approximately $9.2 million, mainly due to declines in selling prices of certain refrigerants during that time period. At December 31, 2020, we had approximately $28 million of total availability consisting of our cash balance and revolver availability. We've reduced our total leverage ratio defined in our term loan and credit agreement as the ratio of debt to adjusted EBITDA from 11.2 times as of December 31, 2019 to 5.8 times as of December 31, 2020, mainly as a result of de-levering our balance sheet and our cost savings in 2020. 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.

Thank you, Nat. We have long-term experience in this industry, which has served us well through many challenging times. Navigating a global pandemic was an unexpected scenario, but we're optimistic that 2021 will bring a recovery in terms of both public health and improve the economy. We are a leader in an industry that provides essential products and services. And having built a loyal customer base, innovative technology and well-established distribution network, we believe we have a solid foundation for which we can grow our leadership position in the refrigerant and reclamation business. Operator, we'll now open the call to questions.

Thank you, ladies and gentlemen, the floor is open for questions. [Operator Instructions] And your first question is coming from Ryan Sigdahl from Craig-Hallum. Ryan, your line is live.

I want to dig in on pricing a little bit. So you mentioned higher pricing in Q4. Can you break that out in what refrigerants, then if you're willing to quantify? And then, secondly, on pricing, can you talk about more recent trends here to start 2021?

So the pricing in Q4 has continued through Q1 thus far. So R-22 has moved up to $14 a pound and higher. And we do think in 2021, there'll be additional price increases there. HFC prices tended to be volatile, but not materially volatile through most of the selling season. But towards the end of - or through Q4, excuse me, or the end of the season, we saw stability across the board on all HFCs with slight price increases, which continue today as well.

And, Brian, can you maybe take a step back, on $14 a pound now, what it was in exiting the selling season last year and maybe in Q4 overall?

So we're probably like at the end of Q3 probably in that $12 range, which it's moved to say $14 through Q4. These are lower volumes this time of year, obviously. But, again, it's a good baseline for where we think it could go. We also believe that the amount of stockpile is down. And that probably one of the large allocation holders has stockpile left, but we're not sure about the other 2. We think at this point, they may be out.

Great. Segues into gross margin. As I look back, it looks like the highest Q4 since 2010, pricing certainly helpful there, but anything else notable to call out, mix or anything else within gross margin or is it primarily pricing?

It's primarily pricing.

Easy enough. And then, looking at volumes, so volumes down in 2020, can you break that out between reclamation and distribution? If you'd quantify it or just at least directionally if one was slightly stronger or weaker than the other?

Reclaimed volumes for us this year were up. But, again, the reclaim itself is not how we look at - because reclaim is just a source of supply relative to the overall distribution. So, really again, when we look at the year, on an overall volume basis, sales volume basis, we've been down, which we think is all attributable to COVID. When we think about 2021, it's not about building off of 2020, but it's really reflecting back to where we were in 2019 and getting back to there and then looking for ways to grow from there.

And just a point of clarification and I'll turn it over. But when you get back to 2019, were you talking on volume basis or revenue basis, because presumably 2020 is higher than 2019.

Well, we give volume basis, but - right, of volume basis. We're always focused on volume and trying to seek ways to grow our volume at rates greater than overall industry growth, which let's just say is middle-single-digits. We've been trying to find ways to continually grow our volume in that 10% to 12% rate.

Great. And then, I guess, 1 follow-up to that, then I will turn it over. You think Q1 will be challenged from a demand standpoint, still as re-openings happen? Or you think you can get back to kind of back to those 2019 levels in Q1? Or you think that's later in the year? Thanks and good luck.

Yeah, thank you. So Q1 will be somewhat challenging, because when you think back, the whole pandemic and shutdowns really happened late March. So, yes, Q1 may be a little difficult from a comparability point of view. But I think we're beginning to see more openings and loosening up relative to closures and the like. There is still a ways to go probably in like areas that we're in like New York, but in places where it's starting to get warm, finally, now in Texas, for example, Florida, things seem to be opening up. So, it may be difficult on comparability in Q1, but not - again, not diminishing our optimism for the entire 2021 sales season.

Okay. Your next question is coming from Gerry Sweeney from ROTH Capital. Gerry, your line is live.

Yeah. Good afternoon, Brian, Nat. Thanks for taking my call.

Sure, good afternoon.

Good afternoon.

In the past, we've talked about how large of a market the R-22 gas is. And is there any way you could sort of refresh us or at least directionally point to what that size of that market was in 2019 by chance? I always think like 35 million pounds was sort of a number, but I'm not sure if that's entirely accurate.

Yeah, so, there is no independent measurement of what the overall size was. The best information available was always the EPA's vintage model. And that, vintage model, projected the demand, let's say, for 2020 to be 50 million pounds. The details to the vintage model are not there, although, there's glimpses of information, particularly as the EPA was going through the rulemaking process to eventually phase-out the R-22 virgin production. We started to think that there were flaws in the model, and we probably would have expressed a few years back that we don't necessarily think that the vintage model is right and it maybe off 20%, which means that maybe the 2020 number would be more like $40 million. We don't really know what the right answer is, but we do think that probably their modeling was off by a greater rate, particularly when you take into account the replacement rate that was much greater than norms that we've seen historically for probably a 5-year window of time, at least, the data is available through 2019, we haven't seen 2020 data yet on placement rates. But the replacement rates were closer to 7% versus the historical, let's say, 5% for a good cliff. And we think that that eroded what the overall 22 remaining installed base was particularly in the air conditioning side, that residential like commercial. And so we do think that the demand is less than what we previously believed it to be. Ultimately, the part of the market where we don't think there's been erosion is the larger system in terms of large commercial industrial uses of 22. While 22 is mainly a comfort cooling residential like commercial, it's still used in those areas as well. We don't think there's been an overall erosion as greater rate, let's say, as the residential like commercials occurred.

Got you. Okay. That's helpful. And I knew there's been a floating number. You would have a better idea than I at this point. But have you also sort of maybe, and again, this tough question, because there's a little bit of unknown. So I try to put paper to pencil between how much COVID in pounds impact - was impacted in pounds 2019 versus 2020? Or is that just a little bit even too challenging to go that far?

Yeah, we really were trying to find various sources of information to try, and like triangulate an estimate. Part of the problem is, like we'll take the building we're in now, it's 20-storey building. Throughout the entire summer, if you came to our building, and you looked at the parking lot, it looked like a Saturday or Sunday, nobody here. So this building has 4 chillers, it certainly probably ran the entire season on 1 chiller. So those are the kinds of things are very difficult to measure, you could attempt to measure closures, and there's a fair amount of data on closures and closure rates and things like that. So we've been kind of guessing that maybe demand could be off as much as 20% this past year on a total basis. We're not sure how right that really is. But we certainly definitely think its double digits, and probably isn't like a 25% number. But it's probably upper teens, 20%, something like that, but that's our estimate of a guess.

Got it. Okay. And I mean, the third part of it, and I hate to sort of - I don't want to beat the dead horse or anything. But have you also looked at, with COVID, it's different by where you live, right? Florida is like what virus? Texas is much more lenient and then we're in the northeast, and things have been locked down. I mean, have you seen greater changes in demand based on geographic location?

We probably didn't spend a lot of time trying to slice and dice it, let's say, state-by-state basis. Again, what we just tried to do throughout this period of time to stay close to our customers, and make sure we were there available. There were a lot of freight interruptions this year with COVID, COVID drivers. Drivers have no place to stay, no place to eat, so logistics was a tremendous challenge this year. And we just tried to work with our various trucking companies and just do a good job as possible on just delivery times and things like that. But there were a lot of freight trucking disruptions this year that were very difficult to work through. But we did our best, I think.

Okay. I mean, at the end of the day, what I'm really trying to get through is like last year certainly some issues this year. I mean, apparently, there's going to be enough vaccine out there by the end of May to get everybody vaccinated, if they choose to be so. And there's an opportunity for openings and volumes could change rather quickly, especially if it's a warmer weather earlier in the northeast, et cetera. So, not only are we looking at some significant price increases year-over-year, we could also have significant volume increases if markets open up. I mean, that's a fair sort of way looking at 2021, yes?

Even think of schools and universities, a lot of those schools and universities closed during the warmest months of the year, they began to reopen and bring students back, but not full populations, obviously, say, September. But at that point in time, the cooling season was pretty much over. But hopefully, we're optimistic that they'll remain at these levels or improve even, and therefore, there should be openings at that class, if you will, that segment during the 2021 cooling season.

Let me just say that, I hope so, because I got kids in school. The - yeah, so - got it. And then the final question. You said stay close to your customers, have you done some channel checks, I got that $13 to $14 sort of range. And there's a sense of optimism, certainly out there on the pricing side that's from the R-22 world. But talking to your customers, are they saying, hey, just in time or is there some opportunity to build inventory. Because even last summer, I think there was a month or 2, where there was a lot of - there was demand and there was strong demand at least for a month or 2. Just curious as to how people are going to be looking at inventory and managing it, and especially as we go into 2Q?

Yeah, we really think, I guess, it goes back to 2018, when the big change occurred. The idea that you're going to stock shelves and carry a lot of inventory, particularly in Q1, those days are over. And we've gotten through a couple of refrigerants cooling seasons, where wholesalers could buy as needed. And we've proven, let's say, the ability even difficult times to get the trucking there. So people probably won't tie up working capital on refrigerants for the foreseeable future.

Got it. That's helpful. Okay. I appreciate it. I'll jump back on the line. Thanks.

Thank you.

Thanks.

[Operator Instructions] Okay. We have a question coming from Jim Giunchi from RBH. Jim, your line is live.

Thank you. Good job, guys, and getting through the year, riding the ship, getting great gross margins in the fourth quarter. Just a curious question, are you thinking about - you've done a good job of paying down debt. Do you think you're going to pay more debt down this year as well?

Yeah. So under the terms of the credit agreement right now, we expect to pay down just a little bit over $5 million of debt from the term-loan perspective. But obviously in the future, we will consider refinancing opportunities.

Okay. And just curious as well, with everything that was discussed on the call, there hasn't been any insider purchases at a very long time at these levels. You think there'd be any interest from insiders purchasing at these levels?

Well, the insiders, management own a fairly large amount of stock. And a lot of management's compensation has been stock-based as opposed to cash. So there's already a significant incentive and built-in incentive for management to own stock and to earn stock as compensation rather than cash.

Okay. Okay. Thank you very much, guys.

Thank you.

Okay. I'd now like to turn the floor back to management for some closing remarks.

Well, thank you, operator. I'd like to thank all of our employees, particularly for their hard work and dedication during a very challenging year. And 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 first quarter results. Have a good evening, everybody.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.