Hudson Technologies Inc (HDSN) 2016 Q1 法說會逐字稿

Greetings and welcome to the Hudson Technologies first-quarter 2016 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. John Nesbett of IMS. Thank you. You may begin.

Good evening and thank you for calling in. 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. Immediately thereafter we will take questions from our call participants.

I'll now take a moment to read the Safe Harbor statement. During the course of this conference call we'll 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 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 you to 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 actual results to differ materially.

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

Good evening and thank you for joining us. I hope all of you had a chance to review our first-quarter 2016 earnings release issued this afternoon.

We're encouraged by our strong start in the first quarter of 2016, which includes solid revenue growth, improved margins, and increased profitability. Our revenue growth in the quarter resulted primarily from higher average pricing on certain refrigerants, including R-22, as well as from increased sales volume of certain refrigerants.

As you'll remember, during the 2015 selling season we saw some margin compression relating to the pricing pressure from HFC-based refrigerants, which are the replacement refrigerants for R-22 as well as for the older CFC refrigerants. That margin pressure began to ease toward the end of the third quarter of last year; and at this point we don't expect to see similar compression this year. As a result, and as anticipated, gross margins improved during the first quarter and we expect to maintain gross margins in the mid to upper 20% range throughout the nine-month 2016 selling season.

Our first-quarter results reflect our long-term belief and strategy that as the industry advances toward the final phaseout of R-22 and begins to adopt initiatives to phase out the next-generation HFCs, Hudson's should continue to see revenue growth and increased profitability. R-22, which is an HCFC, remains the most widely used refrigerant, and during the first quarter we saw continued incremental price increases. While we are in the early stages of a 2016 sales season, currently we are seeing R-22 priced at approximately $12 per pound and prices are beginning again to move slightly higher.

With the phase out of R-22 progressing, the industry has been transitioning to HFCs as the primary replacements of CFCs and HCFCs. As a result, usage of the next-generation HFCs in the aftermarket is increasing at a double-digit growth rate as a result of both new construction and the R-22 replacement markets, which all use HFC refrigerants. Going forward, we expect that HFCs will continue to be a volume growth area for our business.

While it's still early in the repair and maintenance season, we are expecting further growth in reclamation, not just as the industry adjusts to the ongoing R-22 phaseout, but also related to the expected phaseout of the next-generation HFC-based refrigerants. HFCs have high global warming potential and, as such, are drawing increased concern from the worldwide community. Currently we reclaim all HFCs, and we believe they represent an even larger reclamation opportunity beyond the R-22 phaseout.

At the end of 2015, significant initiatives targeting the reduction of HFCs came out of the annual meeting of the parties of the Montreal Protocol and also from the UN Conference on Climate Change. We're encouraged by these developments and are committed to doing our part to limit the omission of greenhouse gases by highlighting the environmental benefits of using reclaimed refrigerants to our customers.

Our reclamation business represents an important growth opportunity, and we are continuing to work with existing and prospective customers to promote our capabilities in meeting demand for R-22, as virgin production of R-22 is methodically reduced and ultimately eliminated by the end of 2019.

We are also ensuring that our customers understand that our reclamation capabilities also apply to HFCs. As the leading reclaimer in the marketplace, with state-of-the-art reclamation facilities and extensive geographic reach, these phaseouts represent a significant opportunity for our business.

As most of you know, integrating the service side of our business has proven to be very important to our total value-add. Recently we announced the multiyear results of our Web-based chiller plant optimization package called SmartEnergy OPS for one of our customers. Not only does this offering provide significant energy savings and allow for greater capacity from the existing infrastructure, it identified actions necessary to prevent a possibly costly failure and an in-plant shutdown, which would have cost about $300,000 in unplanned expenditures.

Similarly, as documented in a recent case study, SmartEnergy OPS saved 25% on the annual energy spend for a large transportation equipment manufacturer. The success realized with our SmartEnergy OPS provides long-term annuity revenues and a more aligned partnership with our customers.

We believe our longevity as the leader in the industry, our established relationships, and our ability to reclaim all refrigerants in our robust distribution network are unique elements of our business that will drive continued revenue growth and profitability. Our experience with the past phaseout of CFCs and with the ongoing phase out of R-22 has helped us develop a reclamation model that we believe will enable us to capitalize on future phaseout of replacement gasses as they occur.

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

Thank you, Kevin. Revenues for the first quarter increased 27% to $28.2 million, as compared to $22.1 million in the first quarter of 2015. The revenue increase was primarily driven by an increase in the price per pound and volumes of certain refrigerants.

Gross margin increased to 27% as compared to 25% in the same quarter last year. As expected, margin pressure from HFCs that was a factor during the 2015 selling season is easing, and we don't expect to see a similar drag on margins during the 2016 sales season.

Operating expenses for the first quarter were $2.5 million, compared to $2.3 million in the previous-year quarter. The increase is primarily attributable to expenses associated with our advertising, payroll, and professional fees.

Net income for the quarter increased to $2.9 million or $0.09 per basic and fully diluted share, compared to net income of $1.9 million or $0.06 per basic and fully diluted share in the first quarter of 2015.

Our balance sheet remains strong. As of March 31, 2016, the Company had $55 million in inventory, down from $62 million at December 31, 2015. Our inventory levels typically decline during our sales season then tend to increase towards the end of the season.

At the end of the quarter, we had $10 million of availability under our credit facility and approximately $43 million of working capital. I'll now turn the call back over to Kevin.

We're encouraged by the market dynamics we've seen during the first quarter of the 2016 selling season. While the R-22 phaseout represents a tremendous opportunity for our business, we are also seeing a great deal of support for the timely and efficient phaseout of the next-generation HFCs and a growing interest in our service business.

We're optimistic that increased environmental concern will establish a clearer path to additional phaseouts, which will in turn drive the adoption of reclamation across all classes of refrigerants. With our proprietary technology, long-standing industry relationships, and proven distribution network we believe we are well positioned to meet the needs of our customers and to adapt to ongoing changes within our industry.

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

(Operator Instructions) Steve Dyer, Craig-Hallum.

Hi, it's Greg Palm on for Steve today. Congrats on the good results.

Not sure if you're willing to break out volume growth versus pricing in the quarter, but based on my math it would seem like volume growth came in better than your 10% growth target. Can you confirm that?

And then directionally is that still a good benchmark for the year?

The growth this quarter was in that range of 10% to 12% on volume. So we got benefit from that, but we also got a similar better fit from price. So approximately -- it's not exactly precise, but approximately 50% of the benefit this quarter compared to last year is price related, and another approximate 50% is based on volume.

Okay. Then directionally is that still a good benchmark for the year?

It's difficult to say, but that's always our target, is to look for volume growth in that 10% to 12% range.

Okay. In terms of reclamation, maybe you can go into a little bit more details about that, what your expectations are for that. What factors can help accelerate growth in that segment?

We are expecting growth again this year as we saw growth last year. Right now it's very early in the reclamation season. The repairs to systems begin to ramp up starting now, into June, and then continue really late in the season and typically lags the refrigerant sales season by a good 30 to 60 days.

We feel that we have strategies in place to capture the growth because we think the growth comes mostly from behavioral changes, in that the contractors should now be rewarded or compensated for obeying the law and returning to gas, whereas maybe in the past -- again, that was punitive. They were charged to return refrigerants.

Right. So as it becomes more evident that 22 is being phased out, which a lot always thought that it would never actually happened; they always thought that there was going to be plenty, it looks pretty obvious out there, there's not gluts of 22 hanging around.

So once that became obvious to people, the wholesalers started acting differently, and I think people are believing reclamation is going to grow. So hence you're seeing -- we saw significant growth last year in reclamation; we're expecting the same this season.

And you're seeing some increase in reclamation on the HFC front as well, is that right?

That is correct. It happens for two reasons. One, HFC has continued to grow every year in terms of percentage of the total market, because every new piece of equipment that goes out there is an HFC piece of equipment.

But now that we're beginning to, let's say, come off of lower prices -- that we discussed in great detail last season -- and the prices are increasing, that allows a reclaimer to pay more money for that used or dirty gas. So it's an opportunity also to see increases in that market.

Okay, great. Last one, just a housekeeping question. Pretty big jump in receivables. Wondering if that's just a function of more sales weighted towards the end of the quarter, or if there is something else to read into there. Thanks.

No, you're exactly right. The first quarter is always that type of quarter where you're not exactly sure when in the month the sales are going to occur. It's just a weighting of the timing of when sales occurred within the quarter.

Okay. Thanks so much.

Gerry Sweeney, ROTH Capital.

Good afternoon, guys. Thanks for taking my call. Wondering if you can talk a little bit about the -- we'll call it the turn of the market. Are you seeing steady buying this quarter, or was there a little bit of an acceleration in buying?

And how is that translating into overall price exiting the quarter and today?

The first quarter always for our industry -- obviously it's not in need, so it's getting your shelves loaded, it's getting that preseason buying. So that's that. It never shocks us, whether that's in January or it's in March; but it's usually somewhere in that first quarter.

This was throughout the quarter. It wasn't all in January; it wasn't all at the end.

But it's steady to a point. But again this isn't huge right now; it's just loading shelves mostly for your first quarter.

We exited the quarter and consistently -- again it went right into the second quarter. Pricing even as recently upticked a little. So it wasn't a -- from a pricing jumped up, and then we blew out inventory, and then it relaxed. It wasn't. It's been a steady growth on prices, but a steady growth on volume throughout.

This is pretty -- again, we've seen other years like this where it's throughout the quarter. We anticipated it jumping up in price -- the little pops, the little pops -- and we're seeing it. We actually just recently saw another one come up.

So into our second quarter it just continues that steady.

Okay. Then (technical difficulty) there was a comment in the press release just talking about the -- mentioning the Q1 piece of pre-buying. This is somewhat of a loaded question, but is that, A, we saw normal pre-buy, we're expecting a strong quarter? Or is that a comment saying: We had a strong pre-buy and maybe the second quarter may have pulled some product forward?

Yes, no, don't we saw any product being pulled forward. This is typical. The whole first quarter is pre-buy every year.

It was a normal year. People, we think, are going down that exact path we've seen in most years' second quarter. We didn't think anything was -- we didn't think it was odd volume that was pulled from the second quarter.

Okay, perfect. Then real quick on HFCs. Now, it sounded like they bottomed at the end of the third quarter and they've been rising ever since. I've done some channel checks, and same, very similar comments.

How do HFCs today compare to this time last year? I just want to get a directional mark as to when the downtrend started and it sounds like when -- where they're coming back, just more from a modeling standpoint.

We're probably at the same price levels we were at in the first quarter of last year. Probably not higher, but just at those levels. The decline last year was steady throughout the nine-month season, so you could almost say that the succeeding month was lower than the previous month.

So really the headwind pressure was likely greatest in the second and third quarter on margin relative to really how it was in the first quarter of last year. So you could say we've rebounded now, and we're back to price levels similar to where we were in the first quarter of last year.

Okay. I know the trade case probably -- hopefully -- gets finalized June, July of this year. Is that still correct?

That timing is correct.

That's great; thank you. I'll jump back in line.

David Mandell, William Blair.

Good afternoon, guys. So did you -- you don't think you saw any benefit in the quarter from more favorable weather?

I really don't think so. This isn't usually -- the first quarter is not usually about weather. Again, it's getting ready for the season. The season hasn't kicked in yet.

That effect starts definitely in the later part of the second and definitely the third, too. But it's really -- the first quarter is almost never about the weather.

Okay. Then are you seeing R-22 substitutes gain any traction in the market?

Well, it's funny, because at this point we're not. Okay? We don't see it yet.

Again, you'd expect as 22 gets higher it's likely we'd start to see them again. But again, we still think it's going to be a smaller piece of the market from an effect.

Then the other piece of that is the higher HFC prices get, since all of the drop-ins are HFCs, that helps the situation, too. We're again less likely to go to a higher price drop-in. So as the drop-in come up in prices, HFCs come up.

All right. Thanks for taking my question.

William Ostrand, Oppenheimer.

Hey, Kevin; hey, Brian. Congratulations on another solid quarter. With respect to weather, can you add some color as to how -- like, looking out my window, and of course net of the acquisitions -- you forecast recent Northeast seasonal weather to affect your future benchmarks for Q2 reclamation?

How we always look at weather is we look for some amount of warm weather, and typically we've used expression three days of close to 90-degree weather. Because you go from a point where you just turned your system on, it may not be working well or at all; and after a couple nights you're annoyed and you spend the money to fix it.

So when we talk about weather, generally we're talking about warmer weather in the North and the Northeast, because that's really where the seasonal demand occurs. And we're looking to see that warmer weather in late May, early June. That's usually around the average time it kicks in.

Some years it starts a little bit early. Some years it starts later. And the years where it starts later are the ones that would have an effect primarily on the second-quarter volumes.

Sometimes you catch that up in the third quarter. It's difficult. That's why we always say it's a nine-month season as opposed to try to pick one particular quarter within that nine-month period of time.

Correct. Regionally, given your acquisitions, where do you see further opportunities?

We covered the Continental United States prior to the acquisition. The acquisition did it give us some additional coverage in the West Coast and particularly in California.

San Diego.

We are seeing additions in California because of that. The area where -- it's still very small, but we think is more longer-term opportunity -- is that also one of the acquisitions had operations in Puerto Rico. We think that in time that that might be an opportunity for us not just to serve that local market but to serve, let's say, Latin America, as a launching pad from that area.

Correct. Like Brazil, Southern Florida. Exactly; sounds good. Congratulations guys, again, and we'll see you soon.

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

Hey, guys. I was just wondering if you could add a little detail to your comments on the potential for HFCs to eventually be phased out, if you think that's something that the EPA would drive, or how that might go.

There's lots of different things happening today, as we discussed a little bit probably last year too. There's different states such as California and looking to put forth some regulation. The EPA is certainly beginning a process of regulation, focusing on equipment use for the most part, more so than the refrigerant itself.

There's a few other things happening, but then the big thing is the global discussion and the concept that the original Montreal Protocol, which allowed the phaseout of the ODS -- which is the CFCs and then the R-22 -- would get amended to provide for a global phase-down to a phaseout of HFCs. We think with the activity in the fall of last year we're further along in that process; that possibly this year when the parties get together, which would be late fall, there may be some evidence, some concrete amendment possibly.

So we still think the best possible outcome is an amendment to the Montreal Protocol. But certainly, for example, the state of California is beginning to promulgate certain restrictions on HFCs, and we'll likely see something coming out of California shortly.

Okay, thanks.

Juan Molta, B. Riley.

Hi, guys. Thank you for taking the question. The question is about competition and what you're seeing as we're seeing -- expecting reclamation to increase, if you're seeing any change in the way they approach buyback pricing or anything else, as those people fight for market share in reclamation.

There's probably nothing unique, different, changing relative to competition. It's likely there will continue to be, obviously, strong competition amongst reclaimers.

We can't predict exactly what will happen with price in the future. We've generally seen that the pricing for acquired used refrigerant is somewhere around 50% of the sale price.

So far -- but it's very, very early in this year's season -- we're not seeing any particular changes there. So I don't know that there is any particular change or difference so far this year, but it's still very early in the reclamation season.

Okay, perfect. Then just a follow-up here on the prepared remark when you mentioned that you achieved volume growth for the quarter. Could you provide maybe a little more color there if that was your volume growth targeted for virgin, reclamation, R-22, HFC, anything else?

When we talk about targeted volume growth, we're talking about specifically refrigerant sales and total volumes. We've been targeting volume growth in that typical 10% to about 12% range. Some years we've done better; a few years we hadn't achieved that targeted level.

So when we talk about volume growth it's (technical difficulty) refrigerant sales.

Okay, thank you.

Thank you. Ladies and gentlemen, we have no further questions in queue at this time. I would like to turn the floor back over to management for closing comments.

Okay, I'd like to thank our employees, our long-time shareholders and those that recently joined us for their continued support. Thank you, everyone, for participating in today's conference call, and we look forward to speaking with you after the second-quarter results. Thanks.