Hudson Technologies Inc (HDSN) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Hudson Technologies fourth quarter conference call. As a reminder, this conference call is being recorded. Later we will conduct a question-and-answer session, and instructions will be given at that time.

(Operator Instructions). I would now like to introduce your host for today's conference, Mr. John Nesbett of Institutional Marketing Services. Please go ahead.

Good morning, and welcome to our conference call to discuss Hudson Technologies' financial results for the fourth quarter and year end 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'll take a moment now to read the Safe Harbor Statement. Statements contained herein, which are not historical facts, constitute forward-looking statements, involve a number of risks -- a number of known and unknown risks, uncertainties, and other factors which may cause the actual results, performance or 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 markets 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 or 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, may, 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 the statement was made. Okay, with that done, I will now turn the call over to Kevin. Go ahead, Kevin.

Good morning and thank you, everyone, for joining us today for Hudson Technologies' fourth quarter and year end earnings conference call. First and foremost, I'm glad to put 2009 behind us and pleased that 2010 is now here, and the EPA mandated phase-out of hydrochlorofluorocarbons or HCFC has commenced. We are moving into what should be a very exciting period for our Company.

Looking at 2009, it was a challenging year for our company, as well as for our entire industry. A combination of the difficult economy and unseasonably cold summer temperatures, particularly in the Northern and Northeastern regions of the US contributed to an overall decline in the demand for refrigerants industry-wide. In the first half of the year, our customers responded to the uncertain economic landscape by deferring their typical preseason refrigerant purchases in an effort to conserve cash. Then as we entered the peak summer months, unseasonably cold temperatures cut back the use of air conditioners in large comfort process cooling systems, which suppressed demand in pricing, causing a significant reduction in refrigerant sales which persisted through the end of 2009. This decline in demand is reflected in our revenues which reflect year-over-year declines, both for the quarter and for the year.

We also experienced a decrease in gross margins, due to an increase in our cost of goods and a decrease in our selling price of refrigerants during the last half of 2009. Unfortunately, between the sluggish economy and the unseasonably cold summer weather, demand for refrigerants lagged throughout the year and the oversupply in the marketplace resulted in stagnation and the eventual decline in the sales price per pound. Our overall decline in revenues appears to be in line with our entire industry.

As the economic trends of 2009 began to emerge, we began to evaluate and adjust our operations in an effort to reduce our cost structure. We succeeded in reducing operating expense by 15% for the year, primarily from one-time reductions in the 2009 compensation of the Company's officers and all of our employees, as well as by reducing our professional fees and eliminating certain positions. We believe that fiscal 2009 was an anomaly, the result of dire economic conditions, and abnormally cold weather. And while there is still uncertainty associated with the economy and the weather, it is believed, and the weather is unpredictable, we believe that we are well-positioned to perform better in the unlikely event that these events were to repeat in 2010. While it may take until the summer before we begin to see a return to more historic gross profit margins, we do expect to see significant improvement in our financial results in 2010.

Looking ahead, we are encouraged by the opportunity presented by the EPA-mandated phaseout of HCFCs, which began with new regulations effective January 1, 2010. As we anticipated, with these new regulations, HCFC production has been reduced to 80% of the EPA's projected US demand, creating an anticipated 20% shortfall in the supply of HCFCs, which are some of the most widely used refrigerants. The supply gap will need to be filled with reclaimed or recycled refrigerants, tripling US demand for recycled and reclaimed refrigerant which is based on current price of R-22 represents a $120 million market opportunity. And the $120 million opportunity could even be greater to the extent that there are price increases for R-22 over the next several years. Hudson is the largest reclaimer in the nation and we believe our ability to help bridge the supply gap through our reclamation activities presents with us a tremendous opportunity. This opportunity will not of course happen overnight, but will take time as the phase out progresses and will require us to execute as well.

We are still cautious, regarding forward-looking guidance. When we looked back at this time last year, we were beginning to see some pre-season buying, but the pipeline ended very quickly and what we believed were simply deferred purchases never materialized due to the unseasonably cold weather. While we are already beginning to see signs of an uptick in refrigerant pricing, it is s too soon in the refrigerant sales season to know for sure where the pricing will go, particularly if our customers hold back on buying until the warm weather returns. It is encouraging to see these signs early, since we did not see this type of pricing activity at this time last year. We were, of course, monitoring the pricing very closely.

Recent EPA data shows that approximately 10 million pounds of HCFC 22 were reclaimed in 2008. With the reduction in imposed under the new rule, commencing in 2010 EPA projects that a total of 27 million pounds of reclaimed or recycled 22 will need to be -- will need to meet the projected service demand. Simply stated, the availability of reclaimed refrigerant will be essential to ensure adequate supply to service large comfort and process cooling systems. Furthermore, the final EPA rule imposes additional annual reductions in HCFC production through 2014, resulting in a total of 103 million fewer pounds available in the marketplace over the next five years. We believe this reduction, likewise, represents a significant opportunity for Hudson.

As a further development, beyond the business opportunities represented by the EPA's phaseout of HCFCs, we recently announced our new alliance with EOS Climate to promote responsible end-of-life handling of ozone-depleting substances, primarily chlorofluorocarbons or CFCs. CFCs, which are also potent greenhouse gases, were phased out of production in 1996. Despite the production phaseout, significant quantities of CFCs can still be found in older systems. Our partnership with EOS provides both companies a route to carbon market revenues, while at the same time driving permanent, scalable emissions reductions. This opportunity for the destruction and monetization of CFCs is a natural extension of our effort to protect the environment and complements our existing business.

Additionally, we are pleased to have been one of only 23 companies and organizations selected to serve on the working group that advised and assisted the Climate Action Reserve in the development of two new protocols, approved just last month, that provide financial incentives for the destruction of ozone-depleting substances in the US and from developing nations. The Climate Action Reserve known as CAR is a premier offset registry for the North American carbon market. Hudson is a pioneer in the refrigerant reclamation industry and we have always promoted the responsible use or reuse of refrigerants through recovery and reclamation. While our systems were initially designed to prevent ozone depletion, these systems enable us to retrieve used or dirty refrigerants from AC enlarged process and cooling systems for reuse or destruction, which discourages the illegal venting of these gases into the atmosphere, thereby preventing any direct contribution to global warming. With the establishment of the new CAR protocols, the control and destruction of ozone depleting substances will be eligible for financial incentives in developing carbon markets.

We entered 2009 with the goal of continuing our five-year track record of double-digit revenue growth, and we are disappointed to have fallen short of that. Having faced the formidable challenges of the past year, we have accordingly adjusted our sales and marketing efforts to mitigate the effects of such conditions in the future. We believe we are well-positioned as an industry leader to capitalize on the opportunities created by the EPA-mandated phaseout of HCFCs and we are optimistic about our business as we enter 2010. With that, I'll 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 fourth quarter and year ended December 31, 2009. Please note that the fourth quarter is typically the slowest quarter of the year and accounts for approximately 10% of our overall revenues.

That being said, revenues for the three-month period ended December 31, 2009 decreased 4% to $2.8 million. Refrigerant side service revenues decreased $190,000 to $660,000, primarily related to a decrease in the number of jobs completed when compared to the same period of 2008. Refrigerant revenues increased by $88,000 to $2.1 million, primarily related to an increase in the number of pounds of certain refrigerants sold. Gross profit margin decreased to 3.4% for the fourth quarter 2009 compared to 22.5% in the fourth quarter of 2008. The decrease in gross profit margins was primarily due to a decrease in the selling price per pound and an increase in the cost of refrigerants sold.

Operating expenses decreased $104,000 during the quarter to $1.6 million compared to $1.7 million in the fourth quarter of last year. The decrease in expenses reflects measures we have taken to control payroll expenses and professional fees. Net loss for the three months ended December 31, 2009 was $1.7 million, or $0.08 per common and diluted share, compared to a net loss of $821,000, or $0.04 per common and diluted share in the fourth quarter of 2008. The increase in the net loss for the fourth quarter of 2009 was primarily due to a decrease in gross profit from refrigerant revenues, and a lower income tax benefit. These factors were partially offset by our ability to decrease certain expenses.

Now, turning to the balance sheet, in spite of a difficult 2009, our balance sheet has strengthened over the past year. In a down year with our revenues being lower than our expectations, we were able to manage our cash flows and lower our outstanding indebtedness. In 2009, we began to take steps with our suppliers, much like our customers had with us, and transitioned our inventory purchases to what for the moment may be a temporary change to adjust in time inventory management.

This inventory management approach is a dramatic change from the approach that has been utilized by our customers and our industry for over 20 years, which encompasses a preseason buying period and a later restocking period. It is too early to determine if the adjustment time approach, which is currently being utilized by the distribution change -- chain is a permanent change or simply a temporary reaction to the current economic climate, but we're confident that we will be able to meet our customer needs and support the expected growth in our revenues. The next few quarters will allow us to better assess any changes which may be deemed permanent in the overall distribution chain.

We have also modified our sales strategy for 2010 in a manner that we believe will better allow us to meet changes in the buying habits of our customers and to a certain extent lessen our overall reliance on the seasonal AC component of our industry. Through the efforts of our employees and our suppliers and the feedback that we receive from our customers, we believe we will have positioned ourselves to rebound from 2009 as the refrigerant markets evolve over the next couple of quarters. At this point, I would like to briefly turn the call back over to Kevin for some final thoughts.

As I mentioned earlier, during 2009, we saw our industry make a one-time shift from the traditional advanced stocking to a more just-in-time model. Consequently, we believe our customers' inventory levels as of December 31, 2009 are significantly lower than the levels they had carried at December 31, 2008. We believe that in this near-term, that we may continue to see smaller, but more frequent number of orders.

Moving to 2010, it remains to be seen whether our customers will continue to carry lower levels of inventory through the season or return to more normal inventory levels. We can report today that in early 2010, we have seen price increases from producers that we did not see last year at this time and we are beginning to see more quoting activity than this time last year. Ultimately, it will take a couple of quarters for us to completely recover and begin to improve on our financial performance at our 2008 levels, which was an extension of five years of revenue growth, with sustained gross profit margins of approximately 30%.

Hudson has the benefit of long-term experience as a leader in the industry with a substantial customer base, state of the art expanded facilities, patented equipment, and experienced personnel that are integral to support our customers and to capitalize on the changing landscape. Operator, we'll now open the call for questions.

(Operator Instructions). Our first question comes from [Jennifer Woffords of Kennan Partners]. Please go ahead.

Good morning. As of today, you guys are about two-thirds of the way through the first quarter. I'm just wondering if you can give us a little indication of what you're seeing.

At this point, we're seeing some clear signs that we like very much. We're reluctant to speculate about the overall quarter. And really the reason would be, if we stepped back one year ago at this exact point really, we found ourselves in a market that was transitioning, because the economy wasn't -- what the economy's effect was on our industry.

Every year the same pattern happens. First quarter preseason buying, people load their shelves up. They don't need the gas yet, but they load them. Is it January, February, or March? Hard to tell, but it's the first quarter. It happens every single year, the same exact pattern.

Last year came along, and it didn't happen. And we kept watching the quarter go and it still could have been March and we were fine with that because it's happened many other times, the last three weeks of March carries the quarter. What became to be very clear, the customers weren't doing that. They were conserving cash. They were de-stocking. We expected then a shift in the buying pattern, meaning summer's going to be a big summer. As soon as it gets hot, we're going to sell a lot of refrigerant. That was the entire industry talking, not just Hudson, but it never got hot so the year turned out like it did again, major shift in our industry of the buying pattern of our industry.

This year comes around, where we're starting out this year, and this is the beginning of the big phaseout, so here comes the big phaseout the industry's been waiting for. Clearly starting this year with inventory levels much lower than they started last year. That's a great sign. We're seeing more quoting activity. We're seeing definitely price increases, and an overall interest that we certainly did not see at this time last year. All of that looks much different than we saw it last year.

But the truth is, we got blind sided last year. Although it looks like the phaseout is having a great affect on our industry and we look like we're heading back to pre-2009 buying patterns, we don't expect it to be an overnight change. We'll feel more confident, providing some more guidance as the warmer weather comes on because we really don't want to -- we don't want to be blind sided and we don't want to blind side you. There are changes in our industry. We like what we're seeing, definitely much more than we did last year. With that, we see possibly 2010 to be a very good year for us. Thanks.

All right. Thank you.

Our next question comes from William Ostrand of Oppenheimer. Please go ahead.

Hey, good morning. Bill Ostrand, Oppenheimer and Company.

Good morning.

Quick question relating to R-22 pricing, what do you see right now? And how does that relate to the approximate $7 million drawdown in inventory values from '08 to '09?

Coming back to the R-22, which again, dominates this market. Nearly 70% of the market is R-22 sales. The new allocation structure that was created by the EPA for the beginning of this year, January 2010, provides that three companies -- the three largest producers, DuPont, Honeywell, Arkema, holding 87% of all the allocations for newly produced refrigerants. There's a significant number of pounds that are controlled by a very small group of people. And historically, the producers -- those three producers, have set pricing and that the market basically follows. What's happened so far early in this year is we begin to see price increases from those three producers.

Now, as Kevin mentioned, it's still early in the season and still a little difficult to determine how much buying will occur, let's say in this quarter relative to the rest of the year, and what kind of inventory levels our customers have carried. But the fact that we're seeing price increases particularly this early in the year is generally a very good sign. Now, it will obviously become more important as we get into the second quarter, that these price increases continue and hold, and then continue to improve. Typically in the past, there were price increases in the second quarter, although that didn't happen in 2009. We're pleased if you will, by the signs that we're seeing right now. But as we said earlier, it's still a little early in the season to be definitive as to exactly where pricing will go.

Okay. Thank you very much, Kevin and Brian. Have a good summer.

Thank you.

Our next question comes from Gary Hamilton of Security Research Associates. Please go ahead.

Good morning, Kevin and Brian. I actually have two questions. One is a very exciting opportunity with the phaseout and I think the numbers you quoted were 27 million pounds approximate shortfall for 2010 and about 100 million pounds over the next five years. Could you talk about if there's any risk to those numbers? In the past, and I think you have mentioned that there's more controls now, but there was import risk, maybe there's some stockpiling risk that has occurred, or even the worst case, where the EPA may revise and allow some additional manufacturing. Are those all pretty much under control or what's your thoughts on that?

A number of things. First, we don't think there's any risk to the EPA allowing more production, what they have said. When the phaseout -- we always knew this was coming. It's legislated. This is a set number. But the only thing that could have happened from between last -- between December 2008 and 2009 in what came out in the ruling was they could have been a straightlined approach for the next five years, same amount produced each year.

But the 100 million pounds that we talked about is not only -- it's basically in addition to what the phaseout that they originally set in 2008. They said an extra 103 million pounds less will be produced over the next five years. That's really good for us. We were happy when that finally came out.

Now, getting to what happens in the marketplace, what are some of the variables, when you say about imports, mid-90s, horrible. Lot of imports came in, illegal imports. They were pretty good at securing the borders. They were very, very good, in fact. With a lot of the producers helping and forming committees down in Washington, illegal import committees as such. And I think they have shut the borders up pretty good compared to what they had in the '90s, in fact, like 99% better than it was.

And in addition, there's a certain amount of legal importation that's allowed coming in of 22. Every year up to this point, they had a certain number of pounds they were allowed to bring in, certain people. That's all been cut way back. Illegal should be shut off. Legal productions, like one-third of that amount was allowed to come in -- is now allowed to come in, so that effect will be obviously even less starting this year compared to what it was any other year. All of it, control wise, it's very good for us.

And as Brian had mentioned, just a few producers are holding most of the quantity in the industry. And again, you're talking responsible players now controlling many, many parts of it, whether it's volumes, prices, all of that. We know the volumes. The prices have to be affected by the volumes. We clearly think there's going to be shortage. We like whose hand is controlling an awful lot of it.

Yes, we think it's a much more controlled market than if you watched over the last -- since 1996 in the last phaseout all the way through, there's been more control, more control, more control. And this one just ratchets it up and puts it to a point where it says, this looks like -- a company like Hudson, with our technology, with our infrastructure, with what we do, yes, I think it lined up pretty well that the controls will push it toward our direction now, which we always did the right thing environmentally. We always felt we did.

We felt we had the best market path or channel that we chose to go after, we thought was very good and we had the best technology. But a lot of things were going against us, making it harder. Still, we have five years of double-digit revenue growth. Now the things we think are going to be playing in our favor and helping us along, so we think we're in a much better position. But yes, all of those factors will affect us. We think they are pretty much under control.

Great. That sounds very exciting, and we definitely look forward to this coming year for your company. Just one last question, the 27 million or so pounds that's going to be available this year, do you -- this is hypothetical, but do you have the resources and the capacity, if you're lucky enough to get 100% of that, to serve that?

It -- we wouldn't expect to get 100%, although we do expect to grow our current market share from where we are today. As Kevin mentioned, we've known this phaseout was coming. We didn't quite know what the exact gap would be, but we felt strongly that the EPA would create a gap. Really in 2008 and in early 2009, we expanded our capacities. In early 2009, we added a second facility, which is designed primarily to handle the smaller cylinders. Those would be the cylinders that look like a propane tank on your barbecue grill that we expect to see coming back from the smaller residential-type contractors.

We've been planning for this. Historically, we've only operated our facility on one shift, so we believe just by simply going to a second shift, we could double our capacity. We're going to keep an eye on that obviously, and looking out for bottlenecks and so forth, but we believe we've planned very well for this. And certainly as this phaseout progresses and as we begin to see where the gas is returning, we may look to expand in other geographies. But at the moment, we feel very comfortable with our resources and what our capacity is to handle significant growth that we are expecting in this year.

Thank you very much, Brian, for that response. Good luck, Kevin and Brian, this year.

Thank you.

Our next question comes from Albert Hanser with ThinkEquity. Please go ahead.

Hi, guys. Can you talk about the impact of this air products run at Airgas and what that does to the landscape and your opinions of that? Thank you.

Certainly air products looks at Airgas for the industrial gas business, which Airgas is very well known for. And only recently has Airgas of reentered the refrigerants market through a couple of acquisitions. It's difficult to say what impact there will be to Airgas' operations, but ultimately, we feel that our strategies and our go-to-market approach is different than Airgas relative to reclamation.

Again, we've historically supported the existing distribution chain, working with the various wholesalers throughout the nation. We believe that most of the gas that's going to return, it's going to come from those residential light commercial contractors. They are going to bring it back to the wholesaler facilities, which there's close to 10,000 of these at different locations around the nation, and the gas is then going to come back to our facility.

Ultimately what may happen with regards to air products and Airgas, it's difficult to say. We don't necessarily think it's going to affect our revenues. We don't think it's necessarily going to affect our results for 2010. As I said, our strategy and go-to-market approach is different than what Airgas' has been thus far.

Thank you.

Our next question comes from Craig Hoagland of Anderson, Hoagland. Please go ahead.

I was hoping you could just say a little bit more about the EOS alliance and what that opportunity is for Hudson.

In the very near term, the opportunity may not be that significant in terms of we're operating still today in a voluntary market for carbon credits. Although with the establishment of the CAR protocol, which is a very significant step forward to creating reliable carbon credits. Previously, the carbon credits that were created with existing protocols were not very reliable or recognizable. Therefore, they had very little financial value.

If you look at some of the CFIs that have been traded on CCX recently, they have been trading as little as $0.10 per metric ton. But when you look at the trading activity, which is really a third-party, arms-length transaction as opposed to a market per se, you're seeing that credits established under the CAR protocol are valued at $6 a metric ton. There's a significant recognition of the CAR protocol. EOS is very well-recognized in this industry, not just in the United States, but throughout the world. CFCs, which are still widely used, are very significant global warming gases, sometimes 10,000 to 1 ratio for CO2. It's a natural evolution for us to be in the marketplace, to be able to acquire CFCs and to the extent that we no longer need them relative to our customer needs, the fact that we can go out and destroy them and monetize that is very significant.

Ultimately, we think the real market opportunity will be extremely significant once there is some climate legislation, which appears to be a year away at least at this moment in time. But in the near-term, there is a market. It's not as vibrant as what we see in Europe and other places in the world. And we will be able to generate financial instruments and monetize the financial instruments, but we really think this is more of a long-term impact to our business.

And if you look at the pattern we've had, one of the things we've always watched very closely are basically mandates or events that can -- that we are lined up to go after. And if you look at the Clean Air Act amendments in the '90s, clearly Hudson started two years before that, seeing that was coming. Was it going to happen? How would it affect? What would the industry look like? Didn't know, but we felt very confident if we jumped in it, we had an opportunity. And we did that. From that, we're probably one of the first, if not the first, reclamation company in the country, well in advance of the law. At this point, yes, is it premature? A little. Maybe not too much.

But again, positioning ourselves, we look at this and we say, I don't think anybody in the country is better positioned to get CFCs than Hudson. We already get them. We clean tremendous amounts still to this day, put them back in the systems. As that changes or it gets destroyed, we're the guys that get it. We're the guys who recover it. We're the guys who reclaim it. We should be the ones to monetize it.

Why wouldn't we start early? And we always feel that we're a little -- maybe a little ahead of the curve. With things like this, maybe that's good, maybe that's bad. But with this, we see this as an opportunity. If it takes off, wonderful. If it doesn't, no harm. We think we've positioned ourselves pretty well for what could be an enormous opportunity.

And is the value of the EOS brings really the validation of the process of the destruction of the CFCs?

It's the validation of the process. It's also the reach internationally, because again, the -- whether the refrigerants exist in the US or in developing nations, it really won't matter. This is a global approach. The CAR protocol recognizes destruction activities of both US-generated refrigerants, as well as international refrigerants.

This is a very big step. We -- while we have the experience and we're a member of the Chicago Climate Exchange, and we have created a role in finding carbon financial instruments, the reach internationally is very significant. And we don't have that resource and that expertise. EOS brings that to the table as well.

Okay. Thanks.

I'm showing no further questions at this time.

I would first just like to thank all of our employees at Hudson who really pooled their efforts during the difficult year we just had. Their hard work, their personal sacrifices helped us to deal with the considerable challenge we faced in 2009. I would like to also thank all of our shareholders for their continued support and confidence. I really look forward to speaking with all of you after the results of our first quarter. Thank you very much.

Ladies and gentlemen, that does conclude today's conference. You may all disconnect, and have a wonderful day.