Hudson Technologies Inc (HDSN) 2009 Q2 法說會逐字稿

Greetings and welcome to the Hudson Technologies second quarter 2009 earnings conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, John Nesbett, Institutional Marketing Services for Hudson Technologies. Thank you. Mister Nesbett you may now begin.

Good morning and welcome to our call to discuss Hudson's financial results for the second quarter 2009. 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 will take a moment to now read the Safe Harbor statement. Statements contained herein which are not historical facts constitute forward-looking statements and involve a number of known and unknown risks and uncertainties and other factors which may cause the actual results, performance, and achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to, changes in the market for refrigerants including unfavorable market conditions adversely affecting the demand for and the price of refrigerants; the Company's ability to source refrigerants; regulatory and economic factors; seasonality; competition; litigation; the nature of supplier and customer arrangements which become available to the Company in the future; adverse weather conditions; possible technological obsolescence of existing products and services; possible reduction in the carrying value of long-lived assets; estimates of the useful life of the assets; potential environmental liability; customer concentration; the ability to obtain financing; and other risks detailed in the Company's periodic reports filed with the Securities and Exchange Commission. The words believe, expect, anticipate, make, plan, should, and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date of the date of the statement -- which the statement was made.

Okay, with that concluded, I would now like to turn the call over to Kevin. Go ahead, Kevin.

Good morning and thank you everyone for joining us today on Hudson Technologies second quarter 2009 conference call.

Obviously our second quarter and six-month financial results are not what we had expected. As previously reported, our first quarter 2009 results were primarily impacted by the economy, while our second quarter results were significantly impaired by the unseasonably cool weather that has persisted in the northern part of the US, particularly in the Northeast.

June is in the top 10 coldest months in history for the month -- for most of the Northeast and for much of the northern portions of the US. We are just experiencing our first 90° temperatures of the summer.

Certain of our refrigerant sales in our industry are very -- are not seasonal. Non-seasonal refrigerant applications are generally process cooling and AC in most southern US states. Both of these applications tend to be affected by the economy rather than by weather, but both of these applications are relatively small percentages of the overall market. The greatest portion of the overall refrigerant market is very seasonal and driven by the AC market.

As we have discussed before, the US refrigerant market -- particularly the refrigerant sales business is seasonal -- meaning that it is driven by AC applications that are primarily located in the northern part of the US. These sales can be affected by both the economy and the weather.

Traditionally, most of our refrigerant sales usually occur during the first and second quarters of each year when our customers typically buy refrigerant in preparation for the air-conditioning season during the warm spring and summer months. Consequently, most of our refrigerants sales were directly affected by reduced air-conditioning usage in the northern part of the country.

As a result of both the economy, but more so the unseasonably cool weather, we are experiencing a 35% decline in our overall revenues.

Other members of our industry have noted the impact of the cool summer weather on their results as well. While we are not pleased with our second quarter results, we do not believe that the declines we've reported are due to any fundamental problems with our business, some strategies or loss of customers, but rather due to the perfect storm of the effect of the current economic landscape on our customers' purchasing behavior during the first quarter of 2009, combined with unseasonably cold weather we have experienced this summer.

2009 has interrupted our five-year track record of double-digit revenue growth. But it does not undermine our enthusiasm for the opportunity that is only a few months away. In fact, we believe that our efforts in 2009 have made us more prepared for the upcoming opportunity.

In 2009, we have converted most of our targeted accounts to our newly introduced Platinum Reclamation Program. By listening to our customers' needs, we believe we have created a reclamation offering that rewards companies for recovering refrigerant and incentivizes them to recover more contaminated refrigerant than in the past. This approach will support the anticipated fourfold growth that will be necessary to support the supply shortfall beginning in 2010.

Additionally, we have added significant reclamation capacity with relatively little capital investment that have helped us to be even more efficient at handling the smaller sized cylinders that we expect to receive as the recovery rates grow. One thing that our center holders have to remember is that while 2009 was somewhat unpredictable, the phaseout of HCFC refrigerants commencing in January 2010 is predictable.

So despite the challenges we face in the first half of 2009, we remain optimistic about the future of our business. With just four months until the phaseout begins, we have seen an increase in the demand for our reclamation services and an increase in the number of pounds processed.

EPA's proposed regulations which, when finalized, would limit HCFC production in 2010 to just 80% of the EPA's projected demand thereby creating a 20% supply shortfall. This projected supply gap will need to be filled with reclaimed or recycled refrigerant, representing approximately a fourfold increase in US demand from current levels.

Today, the total reclamation market is quite small in relation to the overall refrigerant market, representing approximately 5% of the overall supply. However, when the EPA regulations are finalized as proposed, the phaseout will create an estimated $120 million opportunity in a market where we already have a sizable market share and are an industry leader with proven infrastructure and reclamation capabilities.

Moreover, the Montréal protocol mandates deeper reductions in HCFC production by 2015 with all production of HCFC 22 phased out by 2020. Over time, the industry's demand for HCFCs will be fulfilled entirely by reclaimed or recycled gas. Hudson remains committed to taking the steps necessary to take full advantage of this long-term opportunity.

In anticipation of the 2010 phaseout, we continue to market our platinum reclamation program which eliminates penalties and provides incentives for wholesalers to return dirty refrigerants to Hudson. The Platinum Program offering has resulted in the growth of several wholesaler customers that have either not participated in a return program before or previously used other reclaimed programs and have now switched to our Platinum Program.

Another potential opportunity for our customers -- for our Company stems from the proposed climate legislation set forth in the Waxman Markey climate bill. The proposed legislation is expected to create a mandatory cap and trade system and mandate the phaseout of HFC refrigerants.

HFCs are the next generation of refrigerants that have been replacing CFCs and HCFCs, and will eventually represent almost 100% of the overall market. Strategically if legislation is ultimately passed to phase down HFCs as well, it would be very beneficial to the long-term opportunity for our reclamation business.

Additionally, the proposed climate legislation will create a mandatory cap and trade system requiring companies to either reduce CO2 emissions or purchase additional carbon credits. Other (technical difficulty) are available for the reduction of both direct and indirect impacts to global warming.

Our performance and energy optimization business optimizes energy consumption of operating systems and provides remedies that reduce greenhouse gas emissions and energy costs, enabling these locations to operate at optimal levels. Our customers not only benefit from the reduction in energy costs but may also monetize the carbon reduction, which provides them with a very valuable asset.

We are working hard every day to strengthen our leadership role in our industry and focusing on opportunities to grow our reclamation business. We believe our experience in infrastructure, particularly in our reclamation business, will enable us to effectively capitalize on the regulatory changes that face our industry.

I will now hand it over to Brian to provide our detailed financial results.

Thank you Kevin. My comments today will focus on Hudson's financial performance for the second quarter and six months ended June 30, 2009.

Revenues for the three-month period ended June 30, 2009 decreased 37% to $8.3 million. The decrease in revenues was primarily attributable to a decrease in refrigerant revenues of $4.7 million, primarily related to a decrease in pounds sold during this period. RefrigerantSide Services revenues had a slight decrease of $74,000.

As a percentage of sales, cost of sales was 77% of revenues for the quarter ended June 30, 2009 -- an increase from 61% reported in the comparable 2008 period. The increase was primarily due to an increase in the cost per pound of refrigerants sold.

In the second quarter, we did [not] realize price appreciation for our products which, coupled with an increase in a cost per pound, resulted in global cross profit margins. We expect that on a year-over-year basis, we will not compare favorably in 2009 to 2008. However we do not expect that the current adverse trends in 2009 when compared to 2008 will recur in future periods but, rather as we approach and move through the phaseout in 2010, we believe our revenues and gross profit margins will return to historical levels.

Operating expenses for the quarter were $1.2 million, a decrease of $112,000 from the second quarter of last year. The decrease in expenses reflects measures we have taken to control payroll expenses and professional fees.

Net income for the three months ended June 30, 2009, was $164,000 or $0.01 per diluted common shares compared to net income of $3 million or $0.15 per diluted common shares in the second quarter of 2008. The decrease in net income for the second quarter of 2009 was primarily due to a decrease in gross profit for refrigerant revenues and an increase in interest expense. These factors were partially offset by our ability to decrease payroll expenses and professional fees and by a decrease in the income tax provision recorded in 2009.

Now turning to the balance sheet. Inventories at June 30 were $18 million, down from $24 million at December 31, 2008 and our inventory levels will continue to be lowered as we continue through the end of the refrigerant sales season.

We are continuing to pay down our revolving credit facility and we have approximately $4 million less short-term debt outstanding from our season high, which was back in March of this year.

Our relationship with our asset-based lender continues to be strong. We have recently executed an amendment to our facility to lower our financial covenants to be commensurate with our current revenues and operating results. Consequently we have reset our EBITDA covenant commencing June 30, 2009 through the remaining term of our loan.

We believe that our current facility is sufficient to meet our financing needs throughout the term which is due to expire in June 2011.

There is no doubt that this has been a very difficult year for us, with a challenging economy combined with unseasonally cool summer temperatures, leading to a decrease in refrigerant sales volumes for ourselves and our industry. As Kevin noted, we believe that we are well-positioned for the opportunities we expect to see with the January 2010 phaseout of HCFC refrigerants.

At this point I would like to briefly turn the call back over to Kevin for some additional thoughts.

Although this year has been very disappointing, we have made significant gains in the reclamation area. The reclamation market is poised for fourfold growth specifically due to regulations starting in 2010, but in addition we have been successful in increasing our customer base and thus market share by focusing on the area of the industry, where we expect almost all of the reclamation growth to come from.

Hudson was already the leader in this space, but this focused approach using the best technology and infrastructure, we believe, has allowed us to position ourselves for the lion's share of the increase in the reclamation business.

We do thank you, though, for your interest in supporting Hudson and with that, Operator, we would like to open the call for questions.

(Operator Instructions). [Scott Hudginson]. Midsouth Investors.

Just a quick question regarding volume versus pricing. Can you break out or let us know on a pounds basis what the volume was this quarter versus a year ago? And just trying to figure out how much of this decrease was due to the volume versus pricing?

All of our decrease was volume-driven. Pricing has been flat, relative to last year. So the entire revenue decline year over year is volume.

Steve Denault with Northland Securities.

Good morning, everybody. What would you expect the pricing environment to look like from here on through the balance of the year on both the virgin side and the reclaimed side?

First off, there isn't a distinction between virgin product versus reclaimed product. They both meet the same standard which is referred to as the ARI 700 standard, so there is no price distinction.

So far this year, we have not seen a traditional price appreciation that you would see in most refrigerant sales seasons. Normally, you would see some price appreciation the first quarter and then, generally, you would see price appreciation continuing in the second to the third quarter.

We have not seen that this year. We don't expect to see any price appreciation this year. Again this year appears to be from both of volume and pricing very much an anomaly.

Does it have anything to do with what the virgin manufacturers are doing from a production standpoint?

No. I just -- I mean, certainly, the producers of refrigerants are the key leaders to any pricing changes. So whatever direction, let's say, producers want to see pricing or whatever direction that comes from the producers will be applied to the entire industry.

Have they in general curtailed any production? Or are they producing as much as they can through the balance of the year?

We really don't know the answer to that question. We don't know how they might be adjusting their production. Ultimately, we know that the producers have reported on their second quarter and I believe most of the producers did refer to the fact that their sales volumes were also down primarily because of the unseasonably cool weather.

Have you seen any bounceback in volumes in the third quarter with the weather returning to more traditional patterns?

We probably wouldn't expect that we return to traditional patterns. When we look at the month of July for example, most of the North -- particularly the Northeast, where there's a large concentration of AC -- had either no 90° days in the month of July or just a relatively small number.

So the kind of weather we are seeing in this traditionally large AC cooling market is unprecedented in terms of how unseasonably cool the weather is. What you will see, too, is it's actually timing in our industry too. We are not 100% positive what the effect will be, but again we did get to 90° days recently in the Northeast, just a couple enough rope. It is not a long stretch. Some coming.

Your question comes into play, is it too late in the season? And I wouldn't say yes or no. If the question is someone asked me is it, I don't know, but the question -- it's pretty late in our season and that does have an effect.

There is a finite date. There is a point where I don't care how hot it gets, people aren't going to be working on their systems. And we don't know what date that is, but every year is a little different. Especially this year being a difficult to tell because of the heavy preseason buying that takes place first quarter every year. That starts the season out one way. When someone is doing more of a -- I don't want use the term, but something more on the term of a just in time buying, they would tend to be buying later in the season than they would other years, because they wouldn't have had the inventory necessarily on their shelves like they would have other years.

So we have unknowns here that we haven't quite seen. We're a little -- I don't want to say confused on it, but we just -- it's just an unknown. So, very late in the season, but also we know that most of the people we do sell to are carrying less inventory than they normally would. So it's a little difficult to tell where we're exactly at and how far this season can go this year compared to any other year.

We could have told you almost any other year, you get to the middle of July possibly or early August you say, "Okay, the season is coming to an end now on big purchases."

It's different this year. People didn't carry the inventory. So a little bit uncharted territory -- a little bit here. So, we are not going to -- we are certainly not thinking it is over, but we can't quite tell.

Okay. With the Platinum Reclamation Program have there been any changes, incentives to reclaim the [R] 22 or are there new incentives or how does that work?

Really what the Platinum Program was designed to do is to take a guess work as to what the financial consequences would be of returning refrigerant. And when I mean, specifically, is the collection points for this refrigerant are at various wholesale locations throughout the nation.

The wholesalers are not necessarily certain as to what they're sending in. They typically won't have much in the way of laboratory equipment to make certain that what they believe is inside a particular cylinder is in fact there.

So as a consequence, they could have shipped in refrigerant to any reclaimer and instead of let's say receiving money, maybe charge money because the refrigerant they returned was in a poor condition, let's say. We created a program that eliminates that guesswork and fixes the financial reward for the wholesaler so that it becomes a much simpler, much easier, better understood financial result for the activities that they perform.

So it is a completely different approach to the way reclamation has been offered previously.

If you look at basically the holdup in our industry, the goal for us is -- for anyone in our industry is basically if wholesalers, distributors, others in the chain can pass more down to the contractor. You pass more down to the contractor the likelihood is you are going to bring more dirty gas back recovered that stays basically in existence rather than hit the environment.

So our goal has always been to try passing it down the chain. Now we can't force that, but what we can do is take the guesswork, as Brian said, out of the top end of the reclamation so say a distributor knows and feels confident of what he has in his hands. So sometimes people will charge because it's become known, "Hey. I'm going to get billed for this, I have to charge for this."

If you know you are not going to get billed for it, if you know exactly what the financial really picture is for you then you can give a number down. So we believe in trying to drive the number down to the end user here to the contractor so he does the right thing environmentally, we have to give them the tools and we have to make it very clear that they are not going to get charged. Or if they are thinking they are going to get charge, they are going to charge the contractor. We don't want them to do that.

So part of this was to answer all of the questions that they had and make it very black and white for them. So I think that's a big thing as the first step to allowing them to pass down money to the contractor.

Okay and the results so far have been positive, would you say?

We have been very, very happy with the results. And again, we brought George Dinsmore at the time on from Honeywell last year. That was his background. He has a good relationship. He came out -- and relationships are funny things. In talking to people, and talking to distributors, finding out really the -- as good as we were at the technical part of the industry and having a lot of customers, he led to a point where he heard the fears and he heard what the problems were. What did they -- what would make sense to them to make the program better.

And we heard things last year that we actually hadn't quite heard that way before. So having him go in there and have just good conversations with guys he has good relationships with, made it very clear "Oh, we can handle that. We can sell that."

We can put the program, make it different so that they are not worried that it answers all of that guesswork they have. So basically if you are a distributor, you might be looking at, "Am I going to get money for what I am sending to Hudson or am I going to get billed?"

Well, that's a big swing and we answered that with our program right away. They know exactly what they have right away. There's no worry from them and that came really from George and his communication to say that was a big deal to them, but it was easy for us to sell.

So that's why we have had such good luck with this program.

Okay. Thank you.

[Jen Woffords] from [Cannon Partners.]

Good morning. You've talked about the opportunity that you see with the EP regulations that are going to be taking effect in January. I'm just wondering if you could give us a little more color, a little more detail on what you are going to do or what you are doing to capture the market share following that phaseout?

(technical difficulty) this market again through the 90s until now, we are always disappointed that more gas didn't come back because we know where it is going. It is certainly not coming into cylinders and it is certainly hitting the environment. So very negative for the environment and we never really understood why that happened from the point of view of -- we understood why it happened, the price was too low and people were getting charged to bring the gas back so they have emptied it.

That is just the sad truth.

The area of the market where that happens, we feel very comfortable is coming from the residential light commercial area of our industry. That area is the area that we have been committed to for a long time -- building relationships with distributors, with the people who can consolidate this gas, can send it back to us.

And again we think we have been an ally to them. We don't compete with them. This has been a focused effort by Hudson to position ourselves to get as much gas as we can in that area and that is, again, they are our partner and we work that way consistently without going around them.

Well, that is the area we believe is where all the growth is going to come from. It is not going to come necessarily from the industrial commercial because we think they are being pretty good about recovering refrigerant today and not venting it.

The area that is going to have all of the growth is the area we focused on. It is the area that we -- I can't imagine there's a company in the country that has a better lineup of distributors than Hudson does. That is what we have done. And we believe that is where the growth is coming from.

So yes, the industry is poised for as the EPA says fourfold growth, but we firmly believe the industry is going to grow by X percent. Say it's fourfold, but we think we are going to grab more market share because the growth is coming from the area we are the strongest in the industry at. Without question, that is our area. So yes we feel very strong in that area.

Okay. Thank you.

(Operator Instructions). We appear to have no further questions at this time. I'd like to call back over to the speakers for any closing comments.

Okay. I'd like to thank everyone for attending the call today.

As we move through the second half of 2009, we remain committed to meeting the needs of our customers and readying Hudson to take full advantage of the changing regulatory environment and, again, we want to thank you very much.

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