Hudson Technologies CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.23.14 | About: Hudson Technologies, (HDSN)

Hudson Technologies, Inc. (NASDAQ:HDSN)

Q1 2014 Results Earnings Conference Call

April 23, 2014; 05:00 p.m. ET

Executives

Kevin Zugibe - Chairman & Chief Executive Officer

Brian Coleman - President & Chief Operating Officer

John Nesbett - Investor Relations, IMS

Analysts

Philip Shen - ROTH Capital Partners

Steve Dyer - Craig-Hallum Capital Group

Christian Thomas - Sidoti & Co.

Craig Hoagland - Anderson Hoagland & Co.

Robert Manning - Private Investor

Operator

Greetings and welcome to the Hudson Technologies’ first quarter 2014 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).

And now I’ll turn the conference over to your host, John Nesbett of IMS. Thank you. You may now begin.

John Nesbett

Good evening and welcome to our conference call to discuss Hudson Technologies’ financial results for the 2014 first quarter. On the call today we have Kevin Zugibe, Hudson’s Chairman and Chief Executive Officer; and Brian Coleman, Hudson’s President and Chief Operating Officer.

Kevin will review the company’s business operations and future growth strategies and Brian will review the financials, and immediately thereafter we will take questions from our call participants.

I’d like to 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 can see them today, they are not guarantees of future performance.

These statements involve a number of risks and assumptions and since those elements can change, we would ask that you 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 performance and the factors that could cause the actual results to differ materially.

With that, I will now turn the call over to Kevin. Go ahead, Kevin.

Kevin Zugibe

Good evening and thank you for joining us. I hope all of you had a chance to review our first quarter 2014 earnings release issued this afternoon.

As expected we saw a decline of revenues compared to last year. As most of you know, during the second and third quarter of 2013 the price of R-22 dropped by approximately 50%, which was a direct consequence of the EPA’s issuance of its final rule in April 2013, which increased R-22 allowances for 2013 and 2014.

While we cannot control the EPAs actions, we remain focused on the needs of our customers over the course of the year. Of course we are not satisfied with the bottom line results, but we are pleased with our teams performance, achieving an approximate 20% increase in volumes sold and improved performance in our services business for the quarter. We continue to manage our expenses and recorded net income of $160,000 or $0.01 per diluted share.

Due to the price volatility we experienced in 2013, there is limited comparability between the first quarter of 2014 and 2013 and likely for the remaining quarters of this year. As we mentioned in our year-end report for 2013, 2014 can be seen as a fresh start for the phase out of R-22 and in some ways we have hit a reset button. That said, we will still need much of the 2014 refrigerant sales season to get to more normalized result.

After the price retractions of last year, we are now beginning to see price stability. In December 2013 the EPA issued the proposed rule to establish R-22 allowances for the years 2015 to 2019, which provides for a return to annual step-downs, leading to the ultimate phase-out of Virgin Production by 2020.

The EPA’s stated preferred method would provide for a five year straight line reduction schedule beginning in 2015 with allowances of 30 million pounds, which is a 40% reduction from 2014 level and ending in zero allowances by 2020.

During the comment period, which closed on March 10, 2014 the vast majority of commenters, including Hudson advocated for a more aggressive phase-down of R-22. In addition 41 members of Congress signed a litter urging the EPA to be more aggressive in the phase-down of R22. The EPA is expected to issue a final rule later this year, which we believe will likely occur some time in the fourth quarter.

This rule, which will be the EPA’s final rule on the R-22 phase out is very important for the industry, because it will finally provide certain need to the industry and to our existing and potential customers. That’s the exact step-down in Virgin R-22 production from 2015 to 2019.

Uncertainty around the phase out, as well as mixed messages from the EPA have been significant hurdles to overcome in driving growth for the reclamation business. Once the final rule is issued, the industry and our customers will be better able to plan for the ultimate elimination of Virgin R-22 production. Uncertainly has led to industry fear and significant price erosion, but we believe certainty in the market place will rapidly provide stability and long term earnings drivers for Hudson.

While we all would have liked to have seen a stronger first quarter, we are pleased with our progress in the areas that we can control. For example, service revenues increased in the first quarter as a result of our efforts to bolster our energy and remediation solutions business. Our service business is part of our long-term growth strategy and represents a significant opportunity to grow annuity-based revenues, to drive field services of Virgin sales.

While we have an extensive network to harvest recovery refrigerants, we are actively exploring additional strategic partnerships for potential complementary opportunities in international expansion. We are also in the process of developing new proprietary technology, which will improve the efficiency of our reclamation program and expand our reach to accommodate the significant anticipated growth in reclamation.

The EPA projects that the after-markets demand for R-22 in 2020 will be 50 million pounds. Currently approximately 10 million pounds of R-22 are being reclaimed annually, so we are therefore expecting a significant growth in reclamation. We are confident that market reliance on R-22 will create a significant opportunity for our company for many years to come.

With that, I’ll hand it over to Brian to provide our detailed financial results.

Brian Coleman

Thank you, Kevin. Revenues for the first quarter decreased to $15.6 million as compared to $22.9 million in the first quarter of 2013. During the quarter we saw a 20% higher volumes in refrigerant sales and increased service revenues offset by approximately 50% decrease in R-22 pricing in 2014 when compared to 2013.

Operating expenses for the first quarter were $1.3 million compared to the $1.8 million in the previous year quarter, primarily as a result of lower sales administrated expenses. Net income for the quarter was $160,000 or $0.01 per diluted share compared to $4.5 million or $0.17 per diluted share in the prior year quarter.

Now turning to the balance sheet, as of March 31, 2014, the company had $26 million in inventory and a decrease from $34 million at December 31, 2013. Inventories typically come down as we move into the selling season and we see a corresponding increase to accounts receivable.

Our liquidity remains strong. At the end of the quarter we had almost $8 million of availability on our credit facility and approximately $23 million in working capital.

At this point I’d like to turn the call back over to Kevin for some final thoughts.

Kevin Zugibe

The quarter came is basically where we expected as we executed on the things we can control. Its been better than excepted as the overwhelming grounds, well from the industry and members in Congress are strongly urging the EPA to be more aggressive with the phase out of R-22.

The bottom line is that from both an ozone depletion and global warming perspective R-22 is very environmental harmful substance and EPA is hearing from a broad cross-section of stakeholders, but a more aggressive phase out will have the best outcome.

We believe that the EPA can and we are optimistic that it will correct the disruption it caused in its April 2013 ruling. We remain confident in the long-term opportunity for reclamation and believe we are poised to benefit from our competitive position as the larger re-claimer.

Thank you for your interest in and support of our company. Operator, we’ll now open the call to questions.

Question-and-Answer Session

Operator

Thank you (Operator Instructions) Our first question comes from Philip Shen from ROTH Capital Partners.

Philip Shen - ROTH Capital Partners

Hey guys, thanks for taking my questions.

Kevin Zugibe

Hey Philip.

Philip Shen - ROTH Capital Partners

Our checks from last week suggest that pricing of R-22 is around $6 to $7 per pound today or now. Can you comment on where pricing stand from your perspective today and then importantly, where do you see and how do you see pricing trending over the next few months.

Brian Coleman

The pricing has been pretty much around that $7 number throughout the quarter. Its difficult to say – we talked about prognosticating price. It really is influenced by the three largest producers, but it doesn’t appear that there is going to be much activity upwards or downwards at the moment, but anything could happen. Certainly if the weather changes or other conditions change, pricing could change accordingly.

Philip Shen - ROTH Capital Partners

Okay, great. And with EPA, do you have an updated sense on when EPA might issue their final allocations rule. We’ve been hearing from different people that they might be closer to December as opposed to earlier in the year. Any thoughts on that at all?

Kevin Zugibe

I think with what we’ve been dealing for a while now is probably at some time in the fourth quarter. We originally thought later in the year. Now maybe we think a little earlier in the forth quarter, but probably in fourth quarter. Its tough to say, for a while there we thought, possibly it will roll into following year like it has with these other times. We don’t think that now, but some time in the fourth quarter is probably likely, maybe even earlier in the fourth quarter.

Philip Shen - ROTH Capital Partners

Okay and can you talk about what you’re seeing out of the EPA. Obviously the public comment period has ended given either your directors or what you’ve seen from others. What’s either the body language or the general kind of sense that your seeing out of the department.

Kevin Zugibe

Well, I would say like if they give us a feeling one way or another. We are not good guessers on that, but we will say that its been clear in our meeting and with others in Washington that they are feeling a lot more from others that they’ve never felt before. So basically from Senators, from the White House, from the environmental groups, there’s much more pressure on them now to do the right thing than other times and they are brining that up.

So its very clear that they still have more eyes on them than maybe they had before. They don’t know which way they are leaning from that, but all the feeling we are getting, we are pretty optimist from what we are feeling from that way. So we weren’t necessarily, we are more optimistic now than anytime we were last year.

Philip Shen - ROTH Capital Partners

Okay, great. Kevin, in your remarks I think you talked about strategic partnerships and potential international expansion and forgive me if that was Brian, but can you guys talk about what the idea or vision might be for a partnership and if we are talking international expansion, perhaps you can talk about the geography targeted and the rational and so forth.

Kevin Zugibe

First of all let me say, yes it’s a little bit broad and covers a couple of areas of our business, more from a partnership, more from working with other companies with greater reach than we have potentially. We believe certainly in the reclamation industry in a big way and again as I said, we are more optimistic probably now than we were that this is going to be on the right track.

Getting better penetration in the market to get more reclaim gas or dirty gas to reclaim is very important. So we want to put our self in a position to get the most gas we can with a larger reclaimer, but certain people a better footprint that may not even be particularly in this industry in general, but they can help us. So we are working with groups that will have a better path to market as far as we get the gas. So that’s part of staying in a partnership.

On the international end we’re having very good penetration with our energy services. The bundling effect we’ve had from the refrigeration to the steam systems to the air compressors, all the energy users of a large building. We’re having very good penetration now and we’ve been training people in many countries. We have people over in Malaysia to Bangkok today. So we feel very comfortable that everything we do here is applicable over there and maybe more so depending on the energy uses. So that’s more on the international front.

Philip Shen - ROTH Capital Partners

Okay, thanks again. One last question and I’ll jump back in queue. OpEx came in quite low. I think you guys talked about its being driven by lower sales and marketing. Is there a reason why you didn’t split it out and perhaps you can give us the breakdown and then what do you guys expect or how do you expect OpEx to trend as we go through 2014?

Kevin Zugibe

The split is somewhere either between selling and general administrative expenses. So when you think about selling, certainly our sales people are rewarded based on gross profit contribution. So it appears when the gross profits are down sales compensation will be down as well.

On the G&A side we’ll also at times take a hard look at professional fees and other expenditures and look for cost containment to be set in again. I think we’ve mentioned on prior calls, I’m not sure how far back or how often, but in prior calls we probably mentioned there are times when we will invest in some external cost, in external marketing studies for things that may turn into revenues in future periods, like I saw in the current period. So we were trying to invest regularly let say in certain areas for the future, but when things are tight we try to cutback on some of those expenditures.

So back to this particular quarter, we’re probably were very stingy, if that’s the word to use with regards to expenditures or not necessarily be extrapolated out for the future. But certainly we would expect our selling expenses to be down if we continue the trend of lower gross profit.

Philip Shen - ROTH Capital Partners

Okay. Thanks Brian, thank you Kevin. I’ll jump back in queue.

Operator

Thank you. Our next question comes from Steve Dyer from Craig-Hallum Capital Group.

Steve Dyer - Craig-Hallum Capital Group

Thank you. Good afternoon guys.

Kevin Zugibe

Hey Steve.

Steve Dyer - Craig-Hallum Capital Group

I think if I heard you right, overall gas volumes shipped were up about 20% year-over-year in Q1. What do you attribute that to? Is there anything in particular, seeing as it hasn’t exactly been a warm spring yet?

Kevin Zugibe

It really is a combination of new customers, which again we historically have talked about double digit revenue growth and feeling confidant that we could attain that. Now this year that is unlikely because the price of 22 was down, lets say 50% compared to last year. But with that said, there’s still a lot of customers out there, a lot of people that we could sell to, but we don’t. There’s a lot of people that we could create reclamation relationships with that either do not have reclamation programs or possibly we could do a better job at it, so we are seeing growth because of new customers.

But we also are spending a lot more time. Lets say I have a greater sensitivity with our customers this year because of last year. Last year was a difficult year for us, but probably for all of our customers in the industry; the problems we encountered and the write-offs and so forth that we encountered, probably nearly every one of our customers encountered. So kind of work with customers on the standard needs and try to come up with creative solutions I think also was helpful and allowed us to grow revenues.

Steve Dyer - Craig-Hallum Capital Group

That’s helpful, and then are you willing to break out in the sort of the three buckets bring reclaimed, 22, new 22 and then other, kind of how that volume fell out?

Kevin Zugibe

Most of the industry sales and we talked about it in general terms because of really competitive reasons of trying to break things out or not break them out, but most of the industry sales are 22, we are no different than the industry and still will be the case for many, many years to come.

Reclamation tough is still a very small portion of the overall sales. Most of what’s sold in the aftermarket is Virgin Gas. Virgin Gas probably represents more than 80% or close to the 90% of the annual sales. So obviously we would sell more reclaims than others, but at the end of the day its still a small portion of the overall business.

So 22 is still very important. The growth and reclamation is still very important. We think the rule making, that the EPA is now involved in gets them back on track with a set down and allows the growth of reclamation. So 22 is still a very important part of our revenues and our sales.

Steve Dyer - Craig-Hallum Capital Group

Okay, that’s helpful. Then you touched on inventories, which if I look back it’s a lower level than its been in a couple of years and it typically looks like its more kind of flattish to maybe down or touch Q1 over Q4. It took a big step down. How should we think about that entering a period that’s supposed to be a pretty good sales period for you guys?

Kevin Zugibe

Inventory lets say for us right now is normal. Volatility on inventory dollars that you’ve seen, lets say back one, two and three years, almost all of it is likely related to pricing. You had significant price jumps period after period, now you have price decline, you now have a situation, we have a reserve, so fundamentally dollars, its difficult to measure and compare properly.

I think if you were to go back four years or more, you’d see a cycle of higher dollars at lets say again, the fourth quarter, coming down slightly at the end of the first quarter and then coming down yet again in the second quarter and those will be periods of time where we had relative price stability and I think that, we’re just starting to sort of see what happens to inventory when you have lets say, price stability and not price increases per say. But its not a reflection of the volume, the pounds or how we’re managing the inventory. Pretty much we’re doing the same thing that we’ve always done.

Steve Dyer - Craig-Hallum Capital Group

Okay, makes sense. And then lastly, I know one of the things you’ve talked about for a little bit is a more automated reclamation, almost a machine even really. How are you guys thinking about that? Is that sort of a longer-term idea or is that something that your looking to put into motion maybe in the more near term?

Kevin Zugibe

No, we are very much still actually. We’ve had things that we’ve worked from an engineering point of view, technology pieces. We’ve had rollouts for different access to certain customer base. Basically its more of a hub and spoke type model. We’ve had different things we’ve rolled out and say, how do we get to the gas as we said earlier, whether its partnerships, whether its technology, we’re taking it very seriously. We look at it and say, we believe firmly in reclamation.

Again, we’re more optimistic than we’ve been. What the EPA does is going to have a big effect on it, but we think its going to go a certain way and we are looking much closer. We’re testing our second version of other pieces of equipment in our facility in Champaign, Illinois.

So yes, some of it is technology based and that could be nearer term to roll out. So we don’t want to miss it, both here. If we recall we would have rolled it out already, put it that way. The EPA didn’t do what they did in April 2013, so we took a little back step here. We looked closed at our technology and partnerships at rollout scenarios, but yes, technology is a big piece of that and its probably going to be sooner than later.

Steve Dyer - Craig-Hallum Capital Group

Perfect. Very helpful. Thanks guys.

Kevin Zugibe

Thank you.

Operator

Thank you. Our next question comes from Christian Thomas from Sidoti & Co.

Christian Thomas - Sidoti & Co.

Hey guys, how are you?

Kevin Zugibe

Hello.

Christian Thomas - Sidoti & Co.

One question, you may have mentioned this, but I cut off for a few minutes at the question answer session. Do you expect gross margin to remain this depressed heading into the second quarter?

Kevin Zugibe

Gross margins are going to be low this year. We talked about it I think in March, actually February. It did take a couple of quarters to get back to some normalized margin. How exactly and when, its difficult to predict, but it’s certainly not going to happen in one day or one quarter. So it will take probably a good part of this season to get through it all, but you have to get through it all and expect to get back to something more normal.

Christian Thomas - Sidoti & Co.

Okay. John then could you maybe comment a little more about what you, Hudson can do at this point. You already have been doing to influence the EPA and their decision and also try to deliver the comp, while really the big three are seeking to get out of the EPA decision.

John Nesbett

Well, you know if you take a step back we recognize that the EPA could come up with rules that are illogical and certainly appear to be political. So we certainly have added resources and expenses towards getting our voice heard.

We’ve expanded the areas and the places we go to from just the EPA to pieces within the executive branch, members of congress, environmental organizations, trying to get people re-engaged in this story, because it’s a story that many people were engaged in back in the 80’s and early 90’s, but its kind of forgotten, a lot of the discussions about global warming.

So with that said, we think we’ve been pretty successful in getting other people engaged in it, but now its that’s period of time through, where the EPA has a limitation of what they could say or do, because they are in the middle of rule making. So I think its important and we certainly look at continuing what we’ve been doing over the last six to nine months and getting other people engaged that can influence this rule.

So at the end of the day we think we’ve done a good job, we think that we’ve got the right number of people, right groups of people interested and asking questions. It appears from the other comments that are public, you mentioned the larger producers, but quite a number of the stakeholders have similar opinions to us. We think they think that EPA could be more aggressive with their face down in this kind of rule making for that ’15 to ’19 period.

Christian Thomas - Sidoti & Co.

Okay great, thanks.

Operator

Thank you. Our next question comes from Craig Hoagland from Anderson Hoagland & Company.

Craig Hoagland - Anderson Hoagland & Co.

Hi Kevin, hi Brian. Could you comment on the weather this year and how you think that might shape the season that you’re going to have?

Brian Coleman

Long range forecasting has proved to be marginally helpful. There’s been a number of times that the long range forecasting had just been completely wrong, so its difficult to say – we’re not putting reliance on that.

We certainly had a little difficulty in the first quarter. We had some unusual weather in the southern parts, southern eastern parts of the states particularly, but with early in the season we were able to recover from it and it certainly made it more difficult to provide the performance we did, but we’re now in somewhat of a normal weather pattern. Normal weather earlier is always better, but looking at long range forecasting is usually marginally helpful I think.

Craig Hoagland - Anderson Hoagland & Co.

Yes, and the cold spring, you were not expecting to have a big impact?

Brian Coleman

Not necessarily. The key is sort of the trend of warm weather beginning in the very southern part of the United States and then over time progressing north I believe. There’s nothing at the moment that would seem to indicate that’s not going to happen, but difficult to predict.

Craig Hoagland - Anderson Hoagland & Co.

Yes. So we are just entering the real cooling season now in certain parts of the country, in the southern most parts of the country, okay. And so the strength of the Q – your Q1 volumes were very impressive. Do you think the industry volumes were up year-over-year or was that entirely share gain that we are seeing?

Kevin Zugibe

It’s difficult for us to say for sure what the overall was, but for us as Brian said earlier; again we were successful in getting a number of new customers added to. Again, so the volumes of our existing customers were similar to some other years, plus we added others. Again, if we added others, we would have to say we took them away from someone else, so its hard for us to say. So yes, we’re happy with – of our people, of our sales people, their penetration. We weren’t looking at it, but the overall market was that, we were probably leaning more towards to be a little more successful.

Craig Hoagland - Anderson Hoagland & Co.

Right, okay. Thanks a lot guys.

Operator

(Operator Instructions) Our next question comes from Robert Manning, a Private Investor.

Robert Manning - Private Investor

My question was around the amount of the 20% gain that was share gain, you know market share gain and how much was just market. So you’ve I think answered that in response to two earlier questions and thanks, but good going.

Kevin Zugibe

Thank you.

Operator

(Operator Instructions) There are no further questions. I will turn the call back over to management for closing comments.

Kevin Zugibe

Okay, I’d like to thank all of our employees and our long time shareholders for the continued support. Thank you everyone for participating in today’s conference call and we look forward to speaking with you after the second quarter. Thanks.

Operator

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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