Hudson Technologies Inc (HDSN) 2010 Q4 法說會逐字稿

Greetings, and welcome to the Hudson Technologies fourth-quarter 2010 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 of IMS. Thank you, Mr. Nesbett, you may begin.

Good morning, and welcome to our conference call to discuss Hudson Technologies' financial results for the fourth-quarter and year-end 2010. 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. Brian will review the financials, and immediately thereafter, we will take questions from 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, and involve a number of known and unknown risks and 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 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.

With that, I would now like to 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. We're very pleased to have achieved record revenue growth, as well as a return to profitability and increased margins in 2010. As we've indicated throughout the year, we expected significant improvements compared to our 2009 results, and we are very happy to have not only improved on 2009, but also have surpassed 2008 revenues, which was our previous record year. Our 2010 results reflect the anticipated increase in demand for R-22 refrigerants, with customers returning to the more historical purchasing patterns and increased volumes. Likewise, 2010 represents one of the most successful years on the service side of our business, as sustained usage of cooling systems resulted in an increased need for our patented and proprietary services.

Our business benefited in 2010 from the economy's moderate improvement, but also, and more importantly, from a return to more normal weather, which led to a return to more normal buying patterns in our industry, enabling us to return to double-digit revenue growth. Throughout the past five quarters, we referred to 2009 as an anomaly year, and expressed our belief that we would return to the double-digit revenue growth that we had sustained for a consecutive five-year period previous to 2009. It's very gratifying to see our expectations and guidance validated by our 2010 results, and we'd like to thank our shareholders for their support during the difficult 2009 period.

It's important to note that our 2010 performance is a result of our expanding customer base, the expansion of our product offering, and volume growth. Moreover, all of our growth in 2010 was achieved without any increase in refrigerant pricing. In fact, 2010 prices remained below the record pricing that we experienced in 2008. Since the close of 2010, we've begun to see higher refrigerant prices, and we believe we are in a good position for sustained organic revenue growth. Having said that, while we tend to focus most of our discussion on the R-22 phase-out, and the positive influence R-22 pricing can have on our results, it's important to realize that when we are reporting revenue growth, as well as growth in customers and volumes, this growth is not solely related to R-22 refrigerants, but includes growth in the sales of the next generation HFC refrigerants. These HFC refrigerants are expected to represent an increasingly significant portion of the refrigerant aftermarket in the years to come, and will be in use for decades to come.

Hudson's growth relies on serving all areas of the refrigerant aftermarket, not just R-22. And when the industry transitions away from R-22, we expect continuing growth of our sales in the next-generation products. As the HCFC phase-out continues, Hudson's reclamation capabilities will position us as both a producer of phase-out products such as R-22, as well as a supplier for all of our customers' refrigerant needs. As you know, we closely watch the market pricing of R-22 refrigerant because of its potential to provide explosive growth to our revenues and profitability. We have previously discussed the recent difficulties we've encountered trying to forecast R-22 pricing due to the economy and unprecedented cool weather patterns. Recently, however, some of the major refrigerant producers have announced modest price increases in R-22, and we believe this recent price movement signals the producers' expectation of a tightening supply for R-22 in 2011.

While this price movement may be only a small advance forward, it reinforces our belief that the anticipated supply/demand imbalance created by the EPA-mandated phase-out of R-22, should, over time, result in higher R-22 prices, and a corresponding increase in demand for reclamation, which will drive profitability for our Company. Recovery and reclamation are primarily summertime events. So, while these most recent wintertime price increases are not having an immediate effect on our reclamation business, we would expect these price increases to have a positive effect on the growth of reclamation later this year. As the R-22 phase-out progresses, with efficient execution on our part, we continue to believe we are in an excellent position to capitalize on the changes within the refrigerant industry.

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, 2010. Revenues for the quarter increased 49% to $4.1 million; refrigerant revenues increased by $514,000 to $2.6 million, primarily related to an increase in number of pounds of certain refrigerants sold, and to a lesser extent, an increase in certain refrigerant prices. Refrigerant Side Services revenues increased $858,000 to $1.5 million, primarily attributed to an increase in the average revenues per job, as well as an increase in the number of jobs completed when compared to the same period of 2009. We saw a meaningful shift in Refrigerant Side Service jobs from the third quarter into the fourth quarter. Gross profit margins improved to 33% for the fourth quarter of 2010, as compared to 3% in the fourth quarter of 2009. As Kevin mentioned, we anticipated increased margins for the quarter with lower costs of pounds sold, as well as a shift in the service jobs from the third to the fourth quarter.

Operating expenses increased during the quarter to $1.9 million, compared to $1.6 million in the fourth quarter of last year. The increase in operating expenses was primarily due to an increase in payroll costs and professional fees, as we position ourselves for future growth. We reported a net loss of $556,000 or $0.02 per basic and diluted share for the three months ended December 31, 2010, compared to a net loss of $1.7 million or $0.08 per basic and diluted share for the fourth quarter of 2009. For the year ended December 31, 2010, we achieved record revenues of $37 million, an increase of 54% compared to 2009. Refrigerant revenues increased by $12 million to $33 million, primarily related to an increase in number of pounds of certain refrigerants sold. R-Side Service revenues increased $971,000 to $4.1 million, primarily related to an increase in the number of jobs completed when compared to the same period of [2010]. Gross profit margins for the year increased to 22% as compared to gross margins of 16% in 2009.

Operating expenses for the year ended December 31, 2010, increased to $5.9 million, compared to $5 million in the same period of 2009. The increase in operating expenses was primarily due to an increase in payroll costs and professional fees, as we prepared for future growth. During the year, we returned to profitability with net income of $701,000 or $0.03 per diluted share compared to a net loss of $2.5 million or $0.12 per diluted share in 2009.

I'd like to echo Kevin's comments regarding our revenue performance for the year. We demonstrated significant improvement when compared to 2009 annual revenues, and set a new record for Hudson, surpassing our previous annual revenue of $33 million achieved in 2008. We believe that our 2010 results reflect the success of our long-term growth strategy, and reinforce our belief that 2009 interruption in our revenue growth was simply a deviation.

Now turning to our balance sheet, our balance sheet is returning to its historical seasonal pattern.As we pointed out on previous calls, our business is extremely working-capital intensive. We use our working capital to purchase inventories, which sustains the growth of our business. Many businesses and industries operate in extremely high inventory turnover rates, and require less working capital to grow. Hudson, however, purchases inventory typically in the third and fourth quarter, prior to its peak sales season. If we do not have the proper products in the proper containers at the proper locations, we will lose sales. Therefore, we have to strategically manage our inventory levels several quarters in advance of our sales. In order to achieve future growth in revenues and profitability, we expect to utilize more working capital in future periods to support our anticipated double-digit revenue growth. Therefore, in the fourth quarter, as expected, we have relatively large inventory levels, and higher outstanding debt balance.

However, you should expect that once the 2011 refrigerant sales season begins, we will begin lowering inventories and lowering our outstanding indebtedness. This is the essence of why we have a working capital credit facility, as opposed to most businesses that utilize a cash flow debt structure. As you may know, by definition, a working-capital facility is designed to allow a business to borrow monies today to invest in liquid assets, and sell those assets in the future, which in turn allows the Company to better manage the seasonality associated with our cash flow. Consequently, as an investor in this Company, you should expect that at any given time, we will carry limited cash on our balance sheet, due to the fact that we've used our cash to lower our debt, and consequently lower our interest expense. Our cash position is absolutely no indicator of Hudson's cash availability under our credit line. That being said, this quarter you will see an increased cash position as a result of the equity raise completed in the third quarter of 2010. This cash is earmarked for strategic growth opportunities and possible acquisitions.

From an overall cash perspective, we are committed to taking our reported earnings, which for all intents and purposes is cash, and reapply this excess cash back into additional inventory, thereby repeating the cycle of positioning us for growth in refrigerant sales for future periods. With a relative improvement in the economy, and more normal temperatures in the summer of 2010, we have begun to see a gradual return to historical buying behavior, and thus, a return to more seasonal inventory patterns. Our balance sheet at December 31 reflects this more traditional pattern.

At December 31, 2010, we had working capital of $12.2 million, at an increase of approximately $3 million from December 31, 2009. We currently have more than $7 million of availability in our credit facility to help support increases in inventory balance. This availability and the proceeds we've recently raised are sufficient to meet our working capital needs for the foreseeable future.

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

We are very pleased to have achieved double-digit growth over our previous record of 2008, resulting in a new record revenue level for 2010. The refrigerant marketplace remains challenging, but we believe our long-term experience in this sector, combined with the ability to execute efficiently, to drive margin growth and profitability, allows us to take advantage of the new opportunities presented by our changing refrigerant marketplace. We remain confident that we are in a solid position financially to sustain double-digit organic growth, while effectively pursuing our long-term strategies. I'd like to thank our employees for their contributions, and our shareholders for their continued support and confidence.

Operator, we'll now open the call for questions.

Thank you. (Operator Instructions)Thank you. Our first question is coming from Bruce [Sindore], private investor.

Good morning, gentlemen. Hello?

Good morning, Bruce.

Good morning. I was curious, I didn't catch all the numbers, but what percentage of total revenue comes from your service operations?

Typically, the service business is in that 10%, 15% range. It's been pretty constant as a percentage. This year we did see a growth and we're just about at a record level for service. And it's an area we're still looking to enhance, particularly the energy or performance optimization services that we had launched a few years back.

What's the margin on your services compared to margins on the refrigerant sales?

Generally the margins on the services business are much higher. Often when we're out in the field performing services, we're trying to capture the value of what we're providing the customer as opposed to a correlation to our expenses. So, there isn't a specific margin target, but generally, the margins are fairly significant on service work.

Is there some sort of a sustainability program in place to increase the service end of it? Of the business?

We've been focusing, in the last say, two years now to more lead with energy and optimization type services, which eventually lead potentially to carbon credits and the like for our customers or possibly for ourselves. That's how we're trying to provide some predictable and possibly sustainable growth in the service business. It's something, though, that has not seen sustainable growth over the years, but we're still very optimistic about it.

Okay. Thank you very much.

Thank you. Our next question's coming from Jim Kennedy of Marathon Capital Management.

Hi, guys. How are you doing?

Good morning, Jim.

Couple questions for you -- can you talk a little bit about when you talk about you all accumulating some inventory or having some inventory -- can you talk about that relative to the channel and what you've seen historically if you throw out the anomaly of 2009?Are we seeing somewhat normal stocking on your part, or the channel's part?Are we seeing above what we might consider average over a several year period? And I have another question when you answer that one.

Sure. We would say we don't believe, as of let's say December 31, 2010, our sales or the industry have returned to normal levels as we would have in 2008 and prior. We're much closer to normal. But we're not quite entirely back. Throughout 2010 there was still some hesitation on customers' parts about working capital and cash and inventory levels and so forth. So, we wouldn't say at the moment, we don't believe at least, that anyone is overstocking. Possibly some have returned to about their historical levels. But on a overall basis, we don't think the industry has really returned to the kind of inventory levels that they would have carried in the '08 and prior years.

Okay. And relative to a transition to non-R-22 equipment, what are you seeing trend-wise there? Is that below what we might expect a transition to new equipment to be because of the economy, or what are your numbers telling you there?

We're specifically going to say the 410A, all of that is definitely a little lower because of the economy. As far as retrofits, what people thought would happen -- I'm sorry, replacements, what people thought would have happened, 2009 year backed it up. Still somewhat behind, 2010 was much better for everyone, but they're behind on where they could have been. So, on two ends, one is, 22 units, there's probably more 22 units out there than the vintage model the EPA would've predicted because less were replaced in 2009 specifically, and 2010 was behind it a little still. But it is getting back and 410A is getting more and more accepted, so it is picking up steam back to where the EPA is hoping to get back on tap. But, yes, it was somewhat behind on replacement.

Okay. So, if I put those two facts together, the fact that we don't feel like the channel is overstocked in the least bit, and we feel like the replacement cycle is somewhat behind the schedule that the EPA might have wanted, then I would -- and again, these are probably my words, not yours, I would think that would bode well for and for R-22 at least for the next year or two.

Yes. And we'd agree with that. 2009 was a funny year. Not only did they -- in one end which would help 22, it was yes, less 410A units went in, so that's helpful to 22. The reason we didn't see the big benefit was because again, the temperature of 2009, almost no usage was. So, yes, less went in which will be long term good for Hudson in the sense of volume of 22, but it was just an anomaly year because it would be -- basically the demand wasn't there. As we're coming out now where the demand was in 2010 for the running of condensing air conditioning units, what's ending up happening is, now that the 410A -- it's becoming obvious that less 410A units went in there.

So, as you just said, that's what we're seeing is less -- there was less demand for the 410A, more demand for the 22, yet no more 22 is being produced. So, that's all a good sign for us.

Okay. And then, last question relates to the non-refrigerant market. Are you still thinking that your technology is applicable to a little broader market out there?And if so, are we positioning ourselves or do we have our hands full with the refrigerants?

Well, there's other uses for refrigerants throughout the industry. So, you're exactly right. We're right now even working on projects of running our equipment on products -- actually are very similar to the normal refrigerants we'd use, except it's used in a different marketplace. So, it absolutely widens it for Hudson. So now, in marketplace we weren't in and there's a number of them out there that use the exact refrigerant gas or similar refrigerant gases for other applications. So, Hudson for the first time is saying, we can clean those gases, too, with our equipment. And so yes, we're using our equipment now in other sectors that we wouldn't have done before.

And what percentage of your current revenue are those other sectors?

Well, right now they're very, very small. Very small. We just started into these sectors.

Are these sectors going to, in your view, tend to always be a very small part of what you're doing, or do they have the potential a few years down the road to be a meaningful contributor to revenue?

Yes. They definitely have the potential to be meaningful, and on an international level, not just the US.

Okay. Great job, guys. Thank you.

Thanks, Jim.

Thanks.

Okay. Your next question is coming from Craig Hoagland of Anderson Hoagland and Company.

Good morning.

Good morning.

There was discussion on the last call of R-22 dry units being shipped. Do your comments today that the 410A is catching on better indicate that, that is no longer happening?

No. And in fact, on that whole end, just backing up on the whole way this happened, again, the EPA -- we sat with the EPA end of last year. It was very clear they didn't anticipate that happening. So, reading through the rules, yes, you can ship a unit as long as it doesn't have 22 in it, you can ship a new condensing unit and install that unit. The EPA didn't see that coming, so when they looked at the vintage modeling on demand, they didn't include new R-22 units. So, what would be the impact all year long? We thought about it, wondering what it would be. By the end of the year last year, it became very, very clear that most of the big manufacturers in the country jumped back into this. They retooled; started making 22 condensing units. And if you look at the dynamic out there, you go to almost any show now, it's one of the big things.

People are saying dry shipped R-22 units are available, hey, why change a unit out to a whole 410A unit where you have to change the inside air handler, your refrigerant lines, the condensing unit, when you can just get away with changing just the condensing unit alone. It'll be -- for any homeowner, it'll probably be half the cost to go to an R-22 unit rather than a full 410A system, saving you thousands of dollars. We heard it during the year last year. We knew it was a buzz word out there.When we sat with the EPA the end last year, it was obvious that they were thinking it's going to be a bigger hit. Now to see most of the big manufacturers, Trane, Carrier, all of them jumping in, saying hey, we're manufacturing units now for R-22, I think the -- there's a feeling throughout our industry is, although 410A started to look like it was coming back up, with this as an option, especially in this economy for a homeowner to say I can put a replacement system in for half the cost, I think most people are really putting them on their shelves and they're thinking that's going to be a big thing. So, it could be a very big impact for our industry.

Okay. So, the rules have not been changed to make dry units illegal?

No, absolutely not.

Okay. Now, turning to the balance sheet, your inventory is up only 8% year-over-year. That seems like a small increase relative to the sales increase you experienced in the fourth quarter and it sounds like you're hoping to experience in 2011. Were your inventory levels elevated a year ago, or is there a reason why that increases is so small?

There's sort of a two-fold answer to the question. As one of the earlier callers had mentioned, are people returning exactly to the prior patterns? Not quite still yet. So, even our sales -- we're not quite stocking to the levels we might have in the past. We've been working with our producers, our suppliers, to try and be a little bit better managing our inventory. We'll never be a just in time model. But we're trying to better manage our inventory and deliveries.

The other part of it, though, and part of the improvement, particularly in the margin, is the costs in inventory this year are lower, because the sale prices were slightly lower than that of last year. So, the dollars -- they're not necessarily -- are indicative of the pounds, let's say the volume, because of the price differential.So, at the end of the day, we're very satisfied with our current inventory levels, we're very satisfied with our supplier relationships. We do expect to be able to continue to sustain growth in the refrigerants business.

So, we might see your inventory turns actually go up?

The turns should increase, but we'll never be the kind of company that has very, very high inventory turnover.

Sure.

You just -- again, approximately 50% of the annual consumption happens in three months.

Yes.

It's very difficult to obviously buy and sell and match that demand.

Right. Okay. Where are R-22 prices now in the marketplace?

They're about, say, 7% higher coming into this quarter because of the price increases from the producers that went out. So, we still -- it's still difficult to say, like to predict what exactly will happen. The signals all are in the positive direction on pricing based on what the producers have recently done with price increases. We'll obviously know a lot better on the next earnings call and have a much better feeling about how the year -- what we think will play out relative to price.

But what's happening too, is it's not just the 22 price increases, we're seeing it in a lot of the gases. And since they're becoming more and more meaningful, again, more 410A out there, more 134A. As we see big price increases there, years ago it wouldn't have affected us overall, because 22 was such a big driver. But now, because they mean a lot too, big increases on those gases can help us a lot, which we're seeing out there this year.

And is the absolute level of 22 in the $5 or $6 a pound?

We're still probably just under the 5 number right now. We're close to 5. Now, again, if you were to call wholesalers, you would hear much a higher number because they're further down the chain and so forth.

Right.

But, we're starting to see upward movement.

Okay. My last question is you made a couple of comments in your prepared remarks about being a player in the other gases besides R-22 going forward. Is your comment really directed at appreciating the diversity of the revenue base, or was that really directed at sort of pre-wiring us that there may be some expenses associated with building out an organization to grow share in the other gases as well?

No. It doesn't require any build out or additional expenses or anything like that. We wanted to make it clear to our shareholders and investors is that we're not just an R-22 company, but we're a refrigerants company serving the aftermarket. And the next generation refrigerants, while still not a large percentage of the overall market, you could say right now the next generation of refrigerants are 25% to 35%, give or take, but probably between 25% and 30% of the market, will over time eventually be much larger. And so, we wanted you all to be aware that we are focused on the 22 and the historical refrigerants, but we're also focusing on the next generation refrigerants as well.

If you go back in time, it's more a reaction. At one point, everyone thought we were just an R-12 company. And we got in that late, meaning we were certainly -- we were one of the newer entrants. And most of our revenues was R-12. And as R-12 was being phased-out, we always knew we're picking up all the new gases and we were building that up -- so, in the R-22 market, we were building in and building up. We almost had no market share, at one point, for 22. But as 12 was still prevalent for us, we kept building that up, building that up. So, as 12 just went away, which it did, there's really almost no impact on our revenue now, you wouldn't know that because again, a while ago everybody thought we were only a 12 business.

Now, as 22 can potentially go away, we're getting stronger and stronger in the other gases. So, not only will we not see a blip in that, we're taking advantage of it. Because 410A, say, is a new market and before anybody gets a good new market share, we're grabbing that. So, we're very -- we feel we're building up and building up our volumes on each of these new gases. So, for 410A to change out, we're excited about that because this is new ground and so we're not the new guy trying to take old territory and so we feel pretty good about that.

Okay. Thank you very much.

Thanks.

Thank you. Our next question is coming from [Jason Kess] of [SAM].

Hello, guys. Just had a question for you. I think it was maybe a little over a year ago now we did an equity raise. And the communication was it was around deals that were lined up and some interesting opportunities you guys saw in the marketplace. To the best of my knowledge, nothing has happened with that yet. Just sort of curious as to what the status is given the dilution that you guys took on to raise capital.

It's still our plan. We raised the capital in July of last year and was sort of two-fold -- one, to bolster the balance sheet, and also to be available for possible acquisitions. We're still spending time in that area. We're still working in that area. We can't necessarily predict the hour or when anything might happen, but it's something we're definitely still looking at and it's something that we absolutely want to be able to capitalize on.

And also, when we did that, we knew before we went down that path, we needed to actually perform that. So, we did. That allowed us to start the process. What we found was a number of good or bad things, things that were going to take a lot longer because of moving parts in this industry. So, we couldn't have known that some people would need a little bit more time. Didn't lose interest, didn't lose our focus on this, but they would be. So, in other words, say it was just Hudson saying let's get this done, that'd be great. But it didn't work that way. There were just too many moving parts.

So, we're trying to complete some things. We're letting other people complete some things before we can finish up and make sure we're doing the right thing. So, there was a ton of due diligence in this process for everyone. And, so, as much as we would have liked to have said we got this under our belt so now we can go after this and it should be a short process, maybe inside we were hoping it was going to be shorter, but again, it's amazing how many things came up that made us at least look closer and closer, and them also look closer to say is this the right thing? Maybe, but maybe we need to take it a little slower while these things get ironed out. So we haven't lost interest in this. Clearly, we think it's the right thing, potentially and we're working toward that to see if this is going to work for us.

Absolutely. It sounds like it was one deal in particular that you're sort of focused on into the equity raise and post equity raise.

I wouldn't say it's necessarily just one. And again, I think, though, it comes back to that some of these took -- were much slower processes than we were anticipating or hoping for. Because they're certainly out of our control, some of the things that have to happen to even consider an acquisition or something of that type. And so, yes, it was more than one and we're still working down those paths. Nothing's off the table from what we originally thought. It's just certainly slower than what we were hoping originally.

Okay. And should the acquisitions not work out, what are your -- we raised capital we didn't necessarily need to, what would you think about the balance sheet going forward?

Well, we certainly will get to that point if we ever get to that point. I think it would be presumptuous to -- we haven't as yet said that what we were planning to do has fallen apart. In fact, what we're saying is what we were planning to do is still alive and we're still working towards. So, I'm sure if and when that ever did happen, we would find use of any working capital that we have available.

Okay. Terrific. Thanks.

Thank you. (Operator Instructions)Thank you. There are no further questions at this time. I would like to hand the floor back over to Management.

I'd like to thank everyone who participated in the call this morning and we look forward to speaking with you on our next earnings call for the first quarter. Thank you very, very much. Take care.

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