Hudson Technologies Inc (HDSN) 2015 Q4 法說會逐字稿

Greetings and welcome to the Hudson Technologies fourth-quarter 2015 earnings conference call. (Operator Instructions) As reminder, this conference is being recorded.

I would now like to turn the conference over to your host, John Nesbett. Thank you, Mr. Nesbett. You may begin.

Good afternoon and welcome to our conference call to discuss Hudson Technologies' results for the 2015 fourth quarter. On the call today, we have Kevin Zugibe, Hudson's Chairman and Chief Operating 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. Immediately thereafter, we will take questions from our call participants.

I'd like to take a short 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 our business as we 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 of the factors that could cause our actual results to differ materially.

Okay. With that, I will now turn the call over to Kevin Zugibe. Go ahead, Kevin.

Good evening and thank you for joining us. I hope all of you had a chance to review our fourth-quarter and year-end 2015 earnings release issued this afternoon. We are very pleased to have achieved record revenues, solid gross margin performance, and profitability for 2015. Our revenue growth for the year resulted from increased sales volume of refrigerants and higher average R-22 pricing when compared to last year as well as from contributions from our recent acquisitions.

Our performance validates our long-term strategy that as the industry advances toward the final phase-out of R-22 and begins to adopt initiatives to phase out next-generation HFCs, Hudson should continue to see revenue growth and increased profitability.

As many of you will remember, our fourth quarter is typically our weakest quarter, usually representing less than 10% of annual revenues as demand for refrigerants and servicing taper off following the refrigerant season. We saw a decline in revenues in the fourth quarter of 2015 compared to last year's fourth quarter, which had benefited from unusually strong preseason refrigerant sales, driven primarily by the EPA's October 2014 final rule that provided a more aggressive step-down approach for the phase-out of R-22 production.

R-22, which is an HCFC, remains the most widely used refrigerant. And as we expected, we saw multiple price increases throughout the 2015 season, with the price of R-22 rising more than $2.50 per pound in that period. While we are in the early stages of the 2016 sales season, currently we are seeing R-22 prices in excess of $11 per pound.

As we've detailed in previous calls, as the phase-out of R-22 progresses, the industry is transitioning to HFCs as the primary replacement for CFCs and HCFCs. As a result, usage of HFCs is increasing at a double-digit revenue growth for the refrigerant aftermarket as all new equipment as well as the equipment that is replacing R-22 units use HFC refrigerants. Currently, we reclaim all HFCs and we believe they represent an even larger reclamation opportunity beyond the R-22 phase-out.

We are seeing increased momentum, both domestically and internationally, in the effort to curb HFC virgin production. In fact, during the fourth quarter, significant initiatives targeting the reduction of HFCs came out of the annual meeting of the parties in the Montreal Protocol and also from the UN conference on climate change.

We are encouraged by these developments and remain committed to doing our part to limit the emission of greenhouse gases by continuing to inform the industry about our reclamation capabilities and the significant measurable environmental benefits associated with the use of reclaimed refrigerant versus the use of virgin refrigerant.

During 2015, we saw over a 30% growth in reclamations and are continuing to work with existing and prospective customers to promote our ability to meet the demand for R-22 as virgin production is methodically reduced and eventually eliminated. We are also ensuring that they understand that our reclamation capabilities also apply to HFCs. Through our relationship with our customers, we can more effectively plan for the elimination of virgin R-22 production and the eventual phase-out of virgin HFC production.

As the leading reclaimer in the marketplace, with state-of-the-art reclamation facilities and extensive geographic reach, these phase outs represent a significant opportunity for our business. Our long-term relationship in the industry, our ability to reclaim all refrigerants, and our robust distribution network are differentiators for our business that will drive our future revenue growth and profitability. Our experience with past phase outs of CFCs and with the ongoing phase-out of R-22 has helped us to develop a reclamation model that we believe will enable us to capitalize on future phase outs of (technical difficulty) gases as they occur.

With that, I'll hand the call to Brian to provide our detailed financial results.

Thank you, Kevin. Revenues for the fourth quarter decreased 9% to $7.3 million as compared to $8.1 million in the fourth quarter of 2014. Compared to the fourth quarter 2014, we saw a decline in sales volumes of certain refrigerants as well as a decline in service revenues.

Gross margins, while still somewhat lower than our historical margins, due largely to reduced margins on the HFC refrigerant sales, did increase to 19% for the 2015 period as compared to 12% in the same quarter last year. We believe the negative pressures on gross margins from the HFC refrigerants and services are temporary and not likely to have a similar drag on margins during the 2016 sales season.

Operating expenses for the fourth quarter were $3.1 million compared to $2.9 million in the previous-year quarter. The increase is primarily attributable to expenses associated with our acquisitions and payroll expenses. Net loss for the quarter was $1 million or a loss of $0.03 per basic and fully diluted share compared to a net loss of $1.1 million or a $0.03 basic and fully diluted share loss in the fourth quarter of 2014.

Our balance sheet remains strong. As of December 31, 2015, the Company had $62 million in inventory, in increase from $37 million at December 31, 2014. The increase is primarily related to the increase in the cost of refrigerants in preparation for the 2016 refrigerant selling season and to a lesser extent due to our acquisitions. At the end of the quarter, we had $[60] million of availability under our credit facility and approximately $38 million of working capital.

I'll now turn the call back over to Kevin.

We are very encouraged by the market dynamics we are seeing early in the 2016 selling season. While we are successfully operating within the parameters of the R-22 phase-out, we are already seeing a groundswell of support that is generating significant momentum around the timely and efficient phase-out of the next-generation HFCs.

Heightened environmental concern is forging a clearer path to additional phase outs, which will help drive the adoption of reclamation across all classes of refrigerants. We believe our proprietary technology, long-standing industry relationships, and proven distribution network not only position us to meet the needs of our customers, but also give us the ability to adapt to ongoing transitions in our industry.

Operator, we will now open the call to questions.

(Operator Instructions) Steve Dyer, Craig-Hallum.

Our checks would suggest that inventory of R-22 is fairly low, particularly as compared to more recent years. How do you think about the pricing? I know you are seeing sort of $11-plus at the moment. But given the supply-demand characteristics you are seeing, where do you think that can go this summer?

I think we are seeing the same thing you see. And it just seems a tightening out there on availability; prices having no problems drifting up, which we expected they would and they did it throughout last year. We think we expect from what we could see -- again, we can't -- the season hasn't started yet. But from what we see, we can imagine it drifting upwards, going upwards the same kind of way it did in 2015, but hopefully even more so.

So we don't think it will be a monster jump at any one time, but that small increase, small increase, small increase that you will see every month, every two months throughout the season should -- we said $2.50 increase last year. We would think that or hopefully better this year.

Okay, that's helpful. And what would you anticipate that's going to do to your reclamation business? I mean, obviously help it. But any further color you can give there?

Again, it's hard to say. So we saw a certain growth -- obviously, we're happy -- last year. Any increased price, we think, helps. But we think equally -- the reason it is coming up is because it's becoming obvious to people there's a shortage or there will be a shortage, for sure.

As that becomes more apparent to them, I think that will make people bring more dirty gas back to -- it's actually not just the price. It's some are still out there thinking there won't be a shortage. And as soon as it starts becoming a little more glaring to the rest of them, I think they will start being a little more careful with venting gas.

And that was always the hope is what's the reason -- if you ask some people out there right now, some still think there won't be a shortage, which is surprising to us. But once it comes little more clear -- it's not just the price, but the price is following the availability.

Got it. And then one last follow-up. Big jump in inventory this quarter. Is that you guys stockpiling R-22 or is there something else at play there?

No. We don't ever, in our opinion, go long on inventory. We certainly do try to buy inventory, particularly in third and fourth quarter. We certainly try to do it from an opportunistic point of view.

At some level, from a comparability, it's a little misleading only because the acquisitions -- not all the acquisitions were there and all the inventory at December 31, 2014. Also keep in mind, as you well know, that the price of 22 increased during last year, which meant the price of inventory would have to increase as well.

But it's a combination of all these things. But typically, we go into a refrigerant sales season. And typically, our inventory turns following that are 1.2, 1.5, 1.8 turns. We would expect in 2016 it will be something like that again.

Okay, thank you.

Gary [Sweedin], ROTH Capital.

Thank you for taking my call. A little bit of clarity. I think in the script, you mentioned you saw a 30% increase in reclaim. Is that 30% in R-22? Is that your -- off the base pounds? I just want to get a little bit more clarity on that.

The 30% is R-22. But in a way, across the board, we saw these same types of increases. But certainly, R-22, 30%. Also, that's organic. It's not to take into account the acquisitions. Obviously, with the acquisitions, the number is higher even. But it was a very good year for reclaimant growth and reclaim, particularly compared to the last couple years.

Okay. Which brings me to the next question. Is that you taking market share or you do you think that's more and more reclaim activity occurring?

It's difficult to answer that question because we don't have a baseline on [e-pace]. Data is not available yet. We think we have strategies that do allow us to grow market share, but we also saw greater interest and activity in reclaim, not across the entire spectrum.

As Kevin said, there's still people out there that are not necessarily game as much as we think they will be in this year. We are expecting more growth this year. But it could be a combination of both gains in share and certainly just overall increases in reclaim activity. But it's hard to say at this moment.

Okay. And I know you wanted one follow-up. But this question has to do with just market share as well. Can you give us some idea of what Hudson is doing today to increase market share? I think in the past, you talked about some kind of systems to collect it, different drop-off points, etc. But any strategy, strategic initiatives to detach or share, anything like that that's on the board?

Our strategies really have been consistent. There's certainly changes and tweaks overall, but consistent in trying to work within the natural distribution chain and for Hudson Technologies to support the wholesaler network out there throughout the United States.

We still feel and always have felt that that's where the focal point of returns would come from; that's where the growth in reclamation opportunities would come from. And if we strengthen our relationships with the wholesalers, we will strengthen and increase our ability to grow reclamation.

So from a strategic point of view, there's no particular overall changes to it. We just felt that that strategy allowed us to continue to grow and hopefully grow market share as well.

Thanks, guys. I really appreciate it.

David Mandell, William Blair.

Earlier this year, I believe the government made a ruling regarding HFC dumping. Can you discuss the ruling and any possible implications?

Certainly. There was a recent affirmative finding just actually in January. But the ultimate process probably won't conclude until July of this year. It's a legal process. It's long; there's different gates or stages in this. This is now the second affirmative finding in this process.

We obviously feel good about the process thus far. But until we get to that final ruling, anything could happen. But we are happy with what we see. Prices of HFCs are firming. Prices are higher today than, let's say, the bottom of last year. It's hard to visually see where we are going to go. And certainly, to the extent that the final verdict is positive, that will be absolutely more permanently positive for HFCs for the foreseeable future.

But right now, we feel good about the situation and feel good about our ability to make some money in the HFC component of refrigerant sales.

Okay. And then staying on HFCs, both in the press release and on the call, you dedicated a decent amount of time to talking about the eventual reclamation opportunity with HFCs. How far out as the timeline for that right now?

Well, there's possibly two opportunities. Certainly regulatory driven, and the timeline for that is a number of years. Is it two years; is it three years? It's difficult to say. The appearance globally is that there's a lot of momentum to move forward and move forward quickly; but again, it's a process.

However, we feel that there's an opportunity, not necessarily regulatory-driven, but driven by corporate mandates and people beginning to understand the environmental benefit of the use of reclaimed refrigerants versus the use of virgin refrigerants. And we think that may gain some traction sooner than the regulatory path we are on right now.

In addition to that, though, one of the facts with the anti-dumping, all of this, as prices come up on the HFCs, obviously then from an economic point of view, it's definitely more viable to do reclamation, to make it affordable for the contractor, so to get it to us.

And it's the exact same distribution chain. It's the exact same guy who's bringing us 22 today can bring us HFCs. We just have to make it economically viable for them to do that. So all of these come together. So is it the regulatory or is it the anti-dumping? Is it the pricing coming up? Hard to say, but we think the pricing will have a big effect on it, so we will be doing a lot more reclamation.

Thank you for taking my questions.

(Operator Instructions) Craig Hoagland, Anderson Hoagland and Company.

Could you say a little bit about how you try to size up the HFC opportunity? How many pounds per year that market is or how many machines are in the install base or how you think about that?

At one point, just on the 22, which -- probably at that point it had about a 70% market share. There was approximately 100 million units out there. There will eventually be at least 100 million HFC units out there, if not more, and likely more than that.

As new installations and new construction grow, then that overall size can grow. So at some point on top of that, the area of the market that isn't going through or being affected as much of the 22 phase-out is that large commercial-industrial. And that's close to 30%.

So with an HFC phase-out, you would end up with 100% of the market being phased out as opposed to, let's say, currently about 65%. So it will be a larger opportunity than the R-22 opportunity today.

If in fact, if you look at it -- if you look at the CFC phase-out first, those things went from CFCs to HFCs directly. So most of those went straight to HFCs. 22 was sitting off to the side -- as Brian said, a bigger piece of the market. But on cars, everything else that are out there that were R-12 CFCs based are HFCs. Now here comes HCFCs, meaning 22, are going to HFCs.

So now if you look at it, there were two distinct phase outs that are now made to go the entire market toward HFCs. So yes, it's a lot more volume of HFCs comparatively to either the CFC or the HCFC phase-out.

Okay. And going back to R-22, is there a price at which you think substitute gases become more economic? Or is that really driven by the application that needs a refill, and some of those applications are going to require 22 and the substitutes just won't work?

Well, there's clearly both of that. So there's definitely a lot of applications that will stay 22; that's for sure. Others might come in because of price differential, which we did see in 2013. And then they went away again. If the price got high enough, you would expect a piece of the market will do that.

Again, another benefit of the anti-dumping and HFC prices coming up: most of the drop-ins have HFCs, so their prices are going to go up. So we thought it right from the beginning; when we saw the HFC price come up, we said good, that will raise the price on any kind of drop-ins.

So yes, so there's a combination of things that could happen. We don't know what price it would have to get to. But clearly, a big part of the market is going to -- I don't care what price it is -- only would use 22. And we would see some people go to them.

We are not worried about the drop-ins at this point as much, just pricing is going to come up because there's not much availability. And we know clearly our customer base, we feel comfortable, will be able to move the volume that we would move, that we had planned to move this year.

Okay. Thank you, gentlemen.

Tim Johnson, Bard Associates Inc.

The question on the inventories -- how are they valued? And what would you estimate is the market value at current prices?

So our inventory is always on a historical cost basis. So we get the benefit of price increases. And we would have been buying inventory throughout the period, but more focused on the third and fourth quarter.

As either myself or Kevin mentioned, we have already seen increases. Probably at this point, on a comparable basis, we are about $1 a pound higher already and we are just in the beginning of the season compared to where we were at the end of the year. So that would all be built-in, and some sort of positive benefit for us.

Can you estimate the value?

We don't break all those disclosure out and so forth. But we would get that value and that would begin to turn as we turn the inventory. So it could turn at a higher number if we see even further price increases or it could remain. Just depends on what the market price will be.

And is the price up substantially since December 31?

It's up about $1 a pound, [as we said]. And as Kevin said, and possibly I said the same thing: we are expecting to see further price increases. And we believe the price will go up more than it did last year. And last year, it went up about $2.50 throughout the season.

Thank you.

Gary Sweedin, ROTH Capital Partners.

Just one quick question. Kevin, I know you mentioned that not everybody out there in the refrigerant world believes there's going to be a inventory crunch on R-22, per se. But what is the tone out there? Are you getting more inbound calls? Do you -- asking, do you have availability?

It sounds like with the EPA-mandated cut in virgin production, there is -- even my checks had some people raising the question of inventory being hit this year. I would imagine, though, there are some people starting to say, hey, we better make sure we have access to it. Are you seeing any of that?

Well, we are definitely seeing that. In fact, that's the whole reason I said it's surprising some people didn't think there was going to be a shortage and whatever else because they are just starting to get interested. We brought people on board, even wholesalers -- there's wholesalers selling gas for 30 years and they didn't have a reclamation program until last year. And so as we talk to more, we know more out there, we are trying to convince them that the only way you are going to get 22 is from someone like us.

And one of the benefits, and we talked before about marketing strategies, things that have changed over the years for us. That availability of R-22 supply, because the producers won't have it going forward, that's a good carrot for them to get them into this game.

So as we talk to distributors and wholesalers, they are starting to believe for the first time, hey, I need access to it. Unless I have a reclamation program and offer it to the customers, I won't. So that's why they are knocking on the door and that's when it becomes clearer to us that they didn't really have a viable program.

That has just been surprising [to us]. And there's many that are out there. So there's still a lot of guys out there that are just seeing the light. And we do expect to bring them in.

Okay. Do you ever disclose how many distributors that you are working with on the reclaimed business? Are you up 10% a year, 20%?

We don't disclose that. But back to, let's say, our market share, we believe we are at that approximately 25%. Again, we don't have EPA numbers to check that. So you could extrapolate that we have 25% of that overall opportunity.

Okay. I appreciate it, Brian. That's it for my --.

Sean Boyd, Next Mark Capital.

Just a couple quick ones. Kevin, if you don't mind, with the prices being where they are on R-22 and moving up a little bit faster -- at a slightly faster rate this year, reclamation should start to kick in to a greater degree. So volume growth in 2016 -- I assume that should be higher than 2015. Is that the right way to look at this?

We think so, yes. I believe we may have touched upon it, but possibly not. We think there's going to be higher growth this year. Whether it actually does or doesn't, it's hard to say. It's way too early in the season. The returns don't happen until -- begin, let's say, in May.

But we also think 2017 is going to be higher because we think, again, the real acceleration in reclamation will happen as we start to move away from or deplete the stockpile that's been out there, which we think is going to happen again this year.

Got it. And I know in general, you're targeting over 10% volume growth per year. But we seem to be doing something significantly greater than that. And that's just me back into rough numbers. Is that correct?

On an overall basis in 2015, we probably only ended up around 12%, maybe 13% volume growth, which does sound lower than you might have thought. And the only reason it's as low as that was because the fourth quarter 2014 was significantly higher than any other period.

And so on a 12-month-to-12-month basis, the percentage came down probably close to 12% or 13% versus we were probably a much higher upper teens before that fourth quarter. So it threw the comparisons off a little bit.

Yes, yes. So normalized in the high teens. Okay, and then last thing from me. On the operating expenses, I understand the acquisitions drove them up a little bit. So at this, what are we at, $3.1 million for the quarter, is that the kind of number to think about as we go into 2016? Higher, lower? Anything you can help us with there would be great.

Probably it could be a little bit lower as a baseline, but not significantly. So I don't think it's going to throw you off using that. But another way to look at it: if you look at the 12-month period now, we've got baked in all of the acquisitions. So that's really a good baseline. When you are comparing 2014 and 2015, you got apples and oranges between the time of the acquisitions and so forth. So $3.1 million, $3 million, probably in that range.

Got it. Great. Thanks, Brian.

There are no further questions in the audio portion of the conference at this time. I would now like to turn the conference back over to management for closing remarks.

I'd like to thank all of our employees for their hard work, which resulted in a very successful 2015, our longtime shareholders, and those that recently joined us for their continued support. Thank you, everyone, for participating in today's call. And we look forward to speaking to you after the first-quarter results. Thank you.