Hudson Technologies, Inc. (NASDAQ:HDSN) Q2 2021 Earnings Conference Call August 4, 2021 5:00 PM ET
John Nesbett – Institutional Marketing Services, Inc.
Brian Coleman – President and Chief Executive Officer
Nat Krishnamurti – Chief Financial Officer
Conference Call Participants
Ryan Sigdahl – Craig-Hallum
Good afternoon, ladies and gentlemen, and welcome to the Hudson Technologies Second Quarter 2021 Earnings Call. At this time all participants have been placed on a listen-only mode. [Operator Instructions]
It is now my pleasure to turn the floor over to your host, John Nesbett. Sir, the floors is yours.
Thank you. Good afternoon, and welcome to our conference call to discuss Hudson Technologies’ financial results for the second quarter 2022 [ph]. On the call today are Brian Coleman, President and Chief Executive Officer; and Nat Krishnamurti, Chief Financial Officer.
I’d 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 these 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 other factors that could cause our actual results to differ materially.
With that, I’ll now turn the call over to Brian Coleman. Go ahead, Brian.
Thank you. Good evening, and thank you for joining us. We are pleased to have delivered very strong second quarter results, characterized by substantial revenue growth, significantly improved margins and improved profitability. During the quarter, we benefited from very strong demand, coupled with favorable pricing trends across our portfolio of refrigerants. As we anticipated, we saw increased sales activity related to the continued reopening of our economy. Additionally, the return to business as usual coincided with the warm summer weather in the North and Northeast, which has historically driven heightened demand in the marketplace as cooling systems come back online.
From our vantage point today, we’re seeing more normal levels of demand than we had seen last year. From a pricing standpoint, during the second quarter, we saw improved pricing across most refrigerants we sell, and we believe prices will remain stable for the near term with the expectation of increases in 2022 season as the implementation of the AIM Act phasedown begins.
With that reference in mind, I’d like to take a minute to discuss our gross margin performance. The significantly improved gross margin in the second quarter is primarily attributable to the higher selling prices of certain refrigerants. As you know, we take a FIFO approach to inventory management. And during the second quarter, we were largely selling through inventory we had acquired at lower costs. Therefore, we saw a more favorable impact on our gross margin performance.
Moving forward through the balance of the cooling season, we expect to see a return to more historical gross margin performance of the upper 20s to the lower 30% levels, with particularly HFC refrigerant inventory at price points more in line with the current selling prices. Hudson is well positioned in the refrigerant supply chain at two key points serving as a leading provider of all types of refrigerants. To give some context, we sell HFCs, which are currently the most commonly used refrigerant and represents the largest installed base of equipment as well as legacy refrigerants like CFCs and HCFCs. And eventually, we will serve as a supply source for next-generation HFOs.
We are securing our leadership position and with our capabilities and relationships, we remain optimistic about our prospects for the future. As we discussed before, our industry is on the cusp of exciting new regulatory changes, and we remain focused on the opportunities before us as environmental and sustainability legislation is adopted. The AIM Act, which was passed in December of 2020, requires the phasedown of HFC production over the next 15 years with a cumulative 40% reduction in the baseline scheduled to take place in just two and a half years. With a large and growing installed base of HFC systems, reclamation will be critical to maintaining necessary HFC supply levels to ensure an orderly phasedown.
As a leading reclaimer, we believe this represents a significant long-term opportunity for Hudson to act as an HFC supplier while also supporting the transition away from the production of virgin HFCs. In September, the EPA will finalize the HFC allocations likely for the years 2022 and 2023. Hudson believes it will receive allocations under this rule making. With the Allocation rule, we’ll have more visibility around how the industry will be positioned to meet demand as HFC production becomes more limited. Moreover, the EPA will have to administer other aspects of the AIM Act over the next several months, which should help fine-tune the overall financial opportunity for our company.
Along with the establishment of an allocation framework, the AIM Act mandates the EPA to support the growth and development of the reclamation market. Hudson represents approximately 35% of all refrigerant reclamation activity in the U.S., and our capabilities as a reclaimer uniquely position us to support the phasedown of HFC refrigerants and as an effective resource in a circular economy of the refrigerant industry. We are energized by the opportunities we’re seeing not only to grow our business but also to provide our services to benefit the environment. We’re pleased with our progress to date in the 2021 selling season and look forward to continuing to meet the demands of our customers as the end markets they serve return to normal operations. We’re encouraged by the opportunities we’re seeing in the marketplace, and we look forward to leveraging our capabilities to enhance our leadership role as a refrigerant provider and reclaimer as the HFC phasedown begins.
Now I’ll turn the call over to Nat to review the financials. Go ahead, Nat.
Thank you, Brian. For the second quarter ended June 30, 2021, Hudson recorded revenues of $60.5 million, an increase of 27% compared to $47.7 in the comparable 2020 period. The growth is related to increased volume as well as increased selling prices for certain refrigerants during the quarter. Gross margin was 36% for the second quarter of 2021 compared to 27% in the second quarter of 2020.
The improved gross margin is primarily attributable to higher selling prices in the quarter, which in the context of our FIFO approach to inventory, favorably impacted our margin performance. As Brian mentioned, we expect to see a return to more historical gross margin performance as we close out the selling season with inventory that was purchased at a higher price.
SG&A for the second quarter of 2021 was $6.8 million, consistent with SG&A in the second quarter of 2020 and decreased as a percentage of revenue to 11.1% as compared to 14.2% of sales in the same quarter last year. We recorded operating income of $14.4 million in the second quarter of 2021 compared to operating income of $5.2 million in the second quarter of 2020.
Interest expense for the second quarter of 2021was $2.9 million compared to $3.1 million reported during the second quarter of 2020, mainly due to principal payments made on the term loan. The company recorded net income of $11.3 million or $0.26 per basic and $0.24 per diluted share in the second quarter of 2021, compared to net income of $2.4 million or $0.06 per basic and diluted share in the same period of 2020.
At June 30, 2021, we had approximately $41 million of total availability, consisting of our cash balance and revolver availability. 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 forward. Our leverage ratio at June 30, 2021 was 4.18 as compared to 5.84 and a 11.22 as of December 31, 2020 and 2019 respectively.
This improvement is a result of both increased earnings and de-levering the balance sheet. As discussed on the last call. We have initiated the process to refinance our debt and expect to be complete during the fourth quarter of this year.
I will now turn the call back over to Brian
Thank you, Nat. As we close out the 2021 selling season, we’re excited about the opportunities ahead and are focused on growing our leadership position in the refrigerant and reclamation industry.
Operator, we’ll now open the call to questions.
Thank you. [Operator Instructions] And the first question is coming from Ryan Sigdahl from Craig-Hallum. Ryan, your line is now live.
Good afternoon guys. Congrats on the strong results.
Thank you, Ryan.
First one to start on reclamation. Given the increase – significant increases in R-22 pricing, therefore, ability likely to pay more than dirty gas, does that help to improve the feedstock supply?
Not really, Ryan. We expressed frustration in the recovery rates of R-22 for a number of years now. We certainly did expect reclamation to have grown at levels much higher than where we are today and the last reported date, it only shows about 8 million pounds being reclaimed annually. So the economic factor hasn’t really stimulated increases or changes in behavior. Now I think an important distinction about the HFC phaseout though, is that in the HFC phaseout as the AIM Act is currently constructed , has legislated so it’s the law now, the EPA has mandated to find ways to help grow the reclamation market. So what we are expecting is through various means, and these are the further rule-making that the EPA will be dealing with in the future, the EPA is going to seek ways to help encourage increase the overall recovery rates, which really leads to the increases in reclamation volumes. Another factor, I think, that’s probably important on why HFCs are different than the prior phase out.
For example, in the State of California, there’s a lot of reporting requirements regarding recovery rates and so forth at the contractor level. And now that the OEMs are part of a rule making specific to the State of California are being asked to include a certain percentage of reclaim in their factory charge units, I believe the industry is going to be more engaged on an overall basis to encourage recoveries. And when you think about in 2.5 years a 40% reduction off of the current cap relative to the HFC phasedown, that’s a very significant constraint on supply that likely reclaim will have to meet some portion of that overall need.
That’s helpful. Do you think there’s anything that could stimulate R-22 just to help get that feedstock and change behavior? Or is it really shifting from R-22 onto the HFC opportunity at this point?
I mean, we certainly are not giving up giving up on the R-22, and we certainly would love to increase the volumes of recovery on R-22. And certainly, now that the price is over $20 a pound, we’re making closer to $10 per pound when years ago, we were maybe making only $5 per pound. So again, it’s always a gross profit dollar story per pound recovered and resold. So yes, we would look to see increases; yes, we tried to enter different parts of the channel and we’re looking to grow our overall R-22 reclaim but we’re basically suggesting, from a modeling point of view, stick with the current 8 million pound number.
And we know that there should be some further upside in the sale price of R-22 as we continue with the phaseout and being solely sourced with reclaim product and the stockpile should eventually be eliminated.
Got it. So stability in volumes under reclamation for R-22, just not growth at this point?
That’s what we would say is best to model right now because we haven’t really cracked the nut on finding ways to grow the overall recovery rate.
Helpful. Then just on pricing, I don’t think I caught it if you mentioned it, but what was pricing in the quarter and then also current pricing?
So the pricing is now over $20 a pound. We started within the quarter around closer to $15. So we saw growth of R-22 through the quarter and it continues to be at those levels. We still – over time, we can’t say when, we still have that expectation that R-22 could get to $30 a pound, possibly more as we had seen with the CFC phaseout. So we still think there’s price increases available to R-22.
And then on the Department of Defense DLA contract, it looks like it was amended, raised the maximum value recently here. Any update there on that amendment as well as how that contract is progressing?
So yes, we got the five year renewal. We may have done a press release, I think, in late June for that announcement. The DLA does their press releases in the context of when the contracts renew. So that’s why there was a delay. Again, it’s still a large pot of money. It’s not a pot of money that’s restricted on an annual basis. So unfortunately, we peaked it close to about $25 million right now, I think, in an annual revenue. But again, we’re trying to find ways to increase the spend through the DLA contract as opposed to the various agencies using their annual budget. For the first time, the DLA has added a program manager to this contract . So we think that is going to help us in terms of marketing and awareness to be able to grow the dollars through that contract.
One more for me, and then I’ll turn it over. You mentioned debt refinance, you’ve started the process. Any more detail you can give there is expectation by Q4, but where you’re at in the process, given the fundamental improvement for the company as well as the industry. What’s your confidence there and where are you at the process? Thanks.
Sure. No problem. This is Nat here. We’re in preliminary stages right now as far as the process – from a process perspective. As I mentioned on the call, the leverage ratio is down significantly from the last couple of years. So it puts us in a really good position as we move forward, and obviously, with the earnings growth as well, but even better positioned to move forward. We’re expecting to close out probably sometime in Q4. So again, like I said, preliminary stages, we’re working with multiple parties to advance.
Thanks. Congrats again on the nice results, and I’ll turn it over.
Thank you, Ryan.
Okay. We have no remaining questions in the queue. I’d now like to turn the floor back to management for closing remarks.
Well, thank you, Operator. I’d like to thank all of our employees for their continued support and dedication to our business, particularly in these difficult times. I want to, again, thank our long-time shareholders for your support and those that recently joined us support. Thank you, everyone, for participating in today’s conference call, and we look forward to speaking with you after the third quarter results, and have a good night, everybody
Thank you, ladies and gentlemen. This does conclude today’s conference call. Please disconnect your lines. Have a wonderful day.