Hudson Technologies Inc (HDSN) 2014 Q1 法說會逐字稿

Greetings and welcome to the Hudson Technologies first-quarter 2014 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). I would now like to turn the conference over to your host, John Nesbett of IMS. Thank you, you may now begin.

Good evening and welcome to our conference call to discuss Hudson Technologies' financial results for the 2014 first quarter. On the call today we have Kevin Zugibe, Hudson's Chairman and Chief Executive Officer, and Brian Coleman, Hudson's President and Chief Operating Officer. Kevin will review the Company's business operations and future growth strategies and Brian will review the financials and immediately thereafter we will take questions from our call participants.

I'd like to take a moment to read the safe harbor statement. During the course of this conference call, we will make certain forward-looking statements. All statements that address expectations, opinions, or predictions about the future are forward-looking statements. Although they reflect our current expectations and are based on our best view of the industry and of our businesses as we can see them today, they are not guarantees of future performance. These statements involve a number of risks and assumptions and since those elements can change, we would ask that you interpret them in that light. We urge you to review Hudson's Form 10-K and other SEC filings for a discussion of the principal risks and uncertainties that affect our performance and the factors that could cause the actual results to differ materially.

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

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

As expected, we saw a decline in revenues compared to last year. As most of you know, during the second and third quarter of 2013, the price of R-22 dropped by approximately 50% which was a direct consequence of the EPA's issuance of its final rule in April of 2013 which increased R-22 allowances for 2013 and 2014. While we cannot control the EPA's actions, we remain focused on the needs of our customers over the course of the year. Of course, we are not satisfied with the bottom line results, but we are pleased with our team's performance, achieving an approximate 20% increase in volumes sold and improved performance in our service business for the quarter. We continue to manage our expenses and recorded net income of $160,000, or $0.01 per diluted share.

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

In December 2013, the EPA issued a proposed rule to establish R-22 allowances for the years 2015 to 2019 which provides for a return of annual step-downs, leading to the ultimate phaseout of urgent production by 2020. The EPA's stated preferred method would provide for a five-year straight-line reduction schedule beginning in 2015 with allowances of 30 million pounds, which is a 40% reduction from 2014 levels and ending at zero allowances by 2020.

During the comment period which closed on March 10, 2014, the vast majority of commenters, including Hudson, advocated for a more aggressive phase-down of R-22. In addition, 41 members of Congress signed a letter urging the EPA to be more aggressive in the phase-down of R-22. The EPA is expected to issue a final rule later this year, which we believe will likely occur sometime in the fourth quarter. This rule, which will be the EPA's final rule on the R-22 phaseout, is very important for the industry because it will finally provide certainty to the industry and to our existing and potential customers as to the exact step-down in virgin R-22 production from 2015 through 2019.

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

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

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

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

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

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

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

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

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

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

The quarter came in basically where we expected as we executed on the things we can control. What has been better-than-expected is the overwhelming groundswell from the industry and members in Congress strongly urging the EPA to be more aggressive with the phaseout of R-22.

The bottom line is that, from both an ozone depletion and global warming perspective, R-22 is a very environmental harmful substance and the EPA is hearing from a broad cross-section of stakeholders that a more aggressive phaseout will have the best outcome. We believe the EPA can and we are optimistic that it will correct the disruption it caused in its April 2013 ruling. We remain confident in the long-term opportunity for reclamation and believe we are poised to benefit from our competitive position as the largest reclaimer.

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

(Operator Instructions). Philip Shen, ROTH Capital Partners.

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

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

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

I'd think we've been dealing with it for a while now. It's probably just sometime in the fourth quarter. We originally thought later in the year. Now we think a little earlier in the fourth quarter, but probably in fourth quarter. Tough to say. For a while there, we thought possibly it will roll into the following year like it has each of these other times. We don't think that now. But sometime in the fourth quarter is probably likely, maybe even earlier in the fourth quarter.

Okay. Can you talk about what you are seeing out of the EPA? Obviously, the public comment period has ended. Given either your directions or what you've seen from others, what's either the body language or the general kind of sentiment that you are seeing out of the department?

I wouldn't feel like that they would give us a feeling one way or the other. We are not good guessers on what they're thinking, but we will say this, is it's been clear in our meetings and with others in Washington that they are feeling a lot more from others what they have never felt before. So from basically from Senators, from the White House, from environmental groups, there's much more pressure on them now to do the right thing than other times, and they are bringing that up, so it's very clear that they see a lot more eyes on them than maybe they had before. Now, we don't know which way they are leaning from that, but all the feeling we are getting, and we are pretty optimistic from what we are feeling, put it that way. We weren't necessarily -- we are more optimistic now than we were anytime we were last year.

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

First of all, let me say, again, it's a little bit broad and covers a couple areas of our business, more from a partnership, more from working with other companies with greater reach than we have potentially. We believe certainly in the reclamation industry in a big way. Again, as I said, we are more optimistic probably now than we were that this is going to be on the right track. Getting better penetration in the market, to get more reclaimed gas, more dirty gas to reclaim is very important. So we want to put ourselves in a position to get the most gas we can with a large reclaimer, but certain people have a better footprint that may not even be particularly in this industry in general, but they can help us. So we are working with groups that will have a better path to market as far as to get the gas. So that's part of saying a partnership.

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

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

The split is somewhat even between selling and general and administrative expenses. So, when you think about selling, certainly our salespeople are rewarded based on gross profit contributions, so it would appear, when the gross profits are down, sales competition will be down as well.

On the G&A side, we will also at times take a hard look at professional fees and other expenditures and look for cost containment to the extent we can. I think we've mentioned on prior calls, I'm not sure how far back or how often, but in prior calls we probably mentioned there are times when we will invest in some external costs and external marketing studies for things that may turn into revenues in future periods, not necessarily in the current period.

So we are trying to invest regularly let's say in certain areas for the future, but when things are tight, we try to cut back on some of those expenditures.

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

Okay. Thanks Brian. Thank you Kevin. I'll jump back in queue.

Steve Dyer, Craig-Hallum Capital Group.

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

It really is a combination of new customers, which, again, we historically have talked about double-digit revenue growth and feeling confident that we could attain that. Now, this year, that is unlikely because the price of 22 is down let's say 50% compared to last year. But with that said, there are still a lot of customers out there, a lot of people that we could sell to that we don't. There's a lot of people we could create reclamation relationships with that either do not have reclamation programs or possibly we could do better job at it. So, we are seeing growth because of new customers, but we also are spending a lot more time, let's say, and have a greater sensitivity with our customers this year because of last year. Last year was a difficult year for us, but probably for all of our customers in the industry. The problems we encountered and the write-offs and so forth that we encountered probably nearly every one of our customers encountered. So trying to work with customers, understand their needs and try to come up with creative solutions I think also was helpful in allowing us to grow revenues.

That's helpful. And then are you willing to break out into sort of the three buckets being reclaimed 22, new 22, and then other, kind of how that volume fell out?

Most of the industry sales, and we talk about it in general terms because of really competitive reasons of try to break things out or not break them out, but most of the industry sales of R-22 were no different than the industry. That's still the case, will be the case for many, many years to come. Reclamation though is still a very small portion of the overall sales.

Most of what is sold in the aftermarket is virgin gas. Virgin gas probably represents more than 80%, probably closer to 90% of the annual sales. So obviously we would sell more reclaimed than others, but at the end of the day, it's still a small portion of the small portion of the overall business.

So 22 is still very important, the growth and reclamation is still very important, we think the rulemaking that the EPA is now involved in gets them back on track with a step down that allows the growth of reclamation, so 22 is still a very important part of our revenues and our sales.

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

Inventory let's say for us right now is normal. The volatility of inventory dollars that you've seen let's say back one, two, three years, almost all of it is likely related to pricing. You had significant price jumps period after period. Now you've had price declines. You now have a situation where we have a reserve, so fundamentally dollars it's difficult to measure and compare properly.

I think if you were to go back four years or more, you would see a cycle of higher dollars at let's say the end of the fourth quarter coming down slightly at the end of the first quarter, and then coming down yet again in the second quarter. And those would be periods of time where we had relative price stability.

And I think that we are just starting to sort of see what happens to inventory when you have let's say price stability and not price increases per se. But it's not a reflection of the volume, the pounds, or how we are managing the inventory. Pretty much we're doing the same thing that we've always done.

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

No, very much so, actually. We've had things that we've worked from an engineering point of view, technology pieces. We've had rollouts for different access to a certain customer base, basically more of a hub and spoke type model. We've had different things we've rolled out to say how do we get to the gas? As we said earlier, whether it's partnerships, whether it's technology, we are taking it very serious. We look at it and say we believe firmly in reclamation. Again, we are more optimistic than we have been. What the EPA does is going to have a big effect on it, but we think it's going to go a certain way.

And we are looking much closer. We are testing our second version of other pieces of equipment in our facility in Champaign, Illinois. So yes, some of it is technology-based and that could be nearer term to roll out. So we don't want to miss it, the boat here. We thought we would have rolled it out already, put it that way, if the EPA didn't do what they did in April of 2013, so we took a little back step here. We looked closer at our technology, at partnerships, at rollout scenarios. But yes, technology is a big piece of that, and it's probably going to be sooner than later.

Perfect. Very helpful. Thanks guys.

Tristan Thomas, Sidoti and Company.

Hey guys. How are you? One question. You may have mentioned this, I cut out for a few minutes at the question-and-answer session. Do you expect gross margins to remain this depressed heading into the second quarter?

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

Okay, got you. And then could you maybe comment a little more about what Hudson can do at this point or you already have being doing to influence the EPA in their decision and then also try a little bit of comp turn -- what really the big three are seeking to get out of the EPA decision?

If you take a step back, we recognize that the EPA could come up with rules that are illogical and certainly appear to be political. So, we certainly have added resources and expenses towards getting our voice heard. We have expanded the areas and the places we go to from just the EPA to pieces within the executive branch, members of Congress, environmental organizations, trying to get people reengaged in this story because it's a story that many people were engaged in back in the 1980s and early 1990s, but it's kind of forgotten. A lot of the discussion is about global warming. So with that said, we think we've been pretty successful in getting other people engaged in this.

We are now at that period of time, though, where the EPA has a limitation of what they can say or do because they are in the middle of a rulemaking. So I think it's important, and we certainly look at continuing what we have been doing over the last six, nine months, and getting other people engaged that can influence this rule. So, at the end of the day, we think we've done a good job, we think that we've got the right number of people, right groups of people, interested in asking questions.

It appears from the other comments that are public, you mentioned the larger producers, but quite a number of the stakeholders have similar opinions to us. We think they think that the EPA could be more aggressive with their phase down in this final rulemaking for that 2015 to 2019 period.

Okay, great. Thanks.

Craig Hoagland, Anderson Hoagland and Company.

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

Long-range forecasting has proved to be marginally helpful. There's been a number of times that the long-range forecasting has just been completely wrong, so it's difficult to say. We are not putting reliance on that. We certainly had a little difficulty in the first quarter. We had some unusual weather in the southern part, southern and eastern part of the States particularly. But it was early in the season. We were able to recover from it. It certainly made it more difficult to provide the performance we did, but we are now in somewhat of a normal weather pattern. Warmer weather earlier is always better, but looking at long-range forecasting is usually marginally helpful, I think.

Yes, and the cold spring you are not expected to have a big impact.

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

Yes. So we are just entering the real cooling season now in certain parts of the country, in the southernmost --

That's Right.

-- parts of the country. Okay. And so the strength in -- your Q1 volumes were very impressive. Do you think the industry volumes were up year-over-year, or is that entirely share gain that we are seeing?

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

Okay. Thanks a lot guys.

(Operator Instructions). Robert Manning, private investor.

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

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

Again I'd like to thank all of our employees and our longtime shareholders for their continuous support. Thank you everyone for participating in today's conference call, and we look forward to speaking with you after the second quarter. Thanks.

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