Hudson Technologies Inc (HDSN) 2023 Q4 法說會逐字稿

Greetings and welcome to Hudson Technologies Fourth Quarter and Year End 2023 earnings call. At this time, all participants are in a listen-only mode and a question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, John Nesbett of IMS Investor Relations. John, you may begin.

Thank you. Good evening and welcome to our conference call to discuss Hudson Technologies' financial results for the fourth quarter of 2023. On the call are Brian Coleman, President and Chief Executive Officer, and Christian Brady, Chief Financial Officer. Now take a quick moment to read the Safe Harbor statement. During the course of this conference call, we will make certain forward-looking statements and all statements that address expectations, opinions and 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 businesses as we see them today, they are not guarantees of future performance please understand that these statements involve a number of risks and assumptions. And since these elements can change and in certain cases are not within our control, we would ask that you consider and interpret them in that light. We urge you to review Hudson's most recent Form 10 K and other subsequent SEC filings for a discussion of the principal risks and uncertainties that affect our business and our performance, some of the factors that could cause actual results to differ materially. And with that, I'll turn the call over to Brian Coleman.

Good evening, and thank you for joining us. 2023 was a strong year for our company, highlighted by consistently strong cash flow, profitability and extinguishment of our term loan debt. We delivered a solid fourth quarter, consistent with our historical performance for this period. As many of you know, the fourth quarter is historically our weakest as it falls outside of our nine month selling season of January to September. We had a difficult comparison in the fourth quarter of 2023 as the fourth quarter of 2022 benefited from higher sales prices for certain refrigerants, which favorably impacted revenue and margin performance in that period. In the fourth quarter of 2023, we recognized revenues of $44.9 million a decrease of 5% compared to the fourth quarter of 2022. Despite a 24% decline in selling prices, we were able to offset the pricing decline.

Thanks to increase in volume and increased revenues from our DLA or defense logistics agency contract serving the Department of Defense. In 2023, we saw the highest annual revenue generated by our contract with the DLA at $53 million. That said, we believe that approximately $20 million of the 2023 DLA revenue was related to increased deal, a specific program activities that may not be repeated in 2024. Consequently, we may see DLA annual revenues return to more historical levels in 2020 for gross margin in the quarter was 31%, which is slightly lower than last year. Consistent profitability and operating cash flow has allowed us to eliminate over $100 million in outstanding debt originating from the first quarter of 2022.

In the third quarter of 2023, we fully repaid our term loan well before its March 2027 maturity date. These operational successes and the elimination of debt have allowed us to significantly strengthen our balance sheet and provide improved financial flexibility as we move through 2024. Looking at the regulatory landscape in July of 2023, the EPA issued its final rule for allowances, mandating a 40% baseline reduction in Virgin HFC production and consumption allowances for the 2024 to 2028 period.

To recap, Congress legislated the AIM Act, which mandated a 10% step down in Virgin HFC production and consumption for both 2022 and 23 starting in 24 and continuing through 2028, there is a 40% baseline reduction. As a reminder, there are no limitations or caps placed on reclaimed refrigerants. The EPA has also issued a final technology transition rule. Based on the technology transition rule, our industry will see the introduction of lower GDP systems for new construction starting in 2025 as well as a conversion over the next 20 years of the existing installed base of HSC and legacy refrigerant systems, which is estimated to be more than $125 million stationary units. As we have previously discussed, we are agnostic to the various refrigerant types and systems and expect to serve customer demands as they move through the technology transition.

Lastly, the EPA issued a proposed rule that addresses the use of reclaimed refrigerant, which were required to be promulgated as part of the AIM Act legislation. We expect that the proposed rule will be finalized in the summer of 2024, assuming the final rules look similar to the proposed rule will have the first ever federal requirement for the mandatory use of reclaimed refrigerants relative to specific sectors of our the and of our industry. In addition, we are seeing certain states take action either through existing legislation or with various proposals under consideration with reclaim refrigerant use mandates that may be even more aggressive than the final federal rule. As we stated on previous calls, heightened regulatory and reporting initiatives may also drive consolidation in our industry.

While Hudson is well-prepared for more stringent regulatory environment, some of our competitors may find it difficult to comply with the new requirements could take creating potentially attractive acquisition opportunities. Another advantage for Hudson is the shifting landscape for our field service capabilities and expertise. As a supplier of reclaimed refrigerants, we are positioned in two strategic points in the supply chain as a distributor of Virgin refrigerants and as a producer of recycled or reclaimed refrigerants with which then can be distributed through our customers.

Moreover, with our field service capabilities, we can assist in the conversions of cooling systems to run on next-generation refrigerants, and we can recover reclaim any type of refrigerant put simply as the industry evolves. So does Hudson Hudson has held a leadership role in the refrigerant industry for more than 30 years. And we've long been committed to the development of sustainable solutions around responsible refrigerant management and the adoption of reclamation. The AIM Act is creating a very favorable environment for our business by requiring a significant increase in weekly volumes, particularly for high GPHSC.'s like for four a.

And for today, and it's encouraging to see a heightened focused on regulatory issues regarding HSCs as a long-term proponent and practitioner of lifecycle refrigerant management, we believe Hudson is you neatly positioned to help drive the transition to more efficient cooling equipment and greener refrigerants, while also servicing the existing installed base with reclaimed refrigerants. As the industry continues to evolve in line with our support of the transition to more efficient and environmentally friendly cooling equipment and refrigerant management. We are and have been a leader in sustainable refrigerant practices for more than 30 years in January, our reclaimed refrigerant brand and refrigerants and our on-site services were recognized by building green.

An industry leader, focusing on sustainable building solutions as top 10 sustainable products and services for 2023. In July, M-real was recognized again as the top Product of the Year by the environment plus Energy Leadership Awards Program, which recognizes excellence in products and projects that deliver significant energy and environmental benefits. We also joined the coalition a multi-stakeholder network that connects a wide range of key participants to facilitate knowledge, exchange advocacy and joint action towards a rapid global transition to efficient climate-friendly cooling.

Finally, we announced our official support of the global cooling pledge, which was launched at the UN Climate Change Conference or CAP 28 in Dubai in December. This pledge, which has gained overwhelming support from the international community, is a joint initiative between United Arab Emirates, committing countries to reducing their cooling related emissions by at least 68% by 2050. It establishes several other targets, including the creation of minimum energy performance standards by 2030. We are very pleased with both our fourth quarter and full year 2023 results. I do want to point out that we are coming up against a tough comp in Q1 of 24 when compared to 2023.

With regard to refrigerant pricing at this point in the season, we continue to see pricing pressure with the price of certain refrigerants remaining consistent or in some cases, slightly below where we were when we exited 2023, which is well below the pricing we saw in the first quarter of 2023. These market dynamics are also contributing to cautious early season customer purchasing patterns. With the current pricing structure in 2024, we do expect to operate much closer to the 35% gross margin expectations we have previously communicated than the 39% we achieved in 2023. Moreover, during 2023, we saw particularly strong revenue from the DLA with an annual spend of about $53 million. We believe this deal a specific program activity purchases, which began in Q1 of 23 will not be repeated in Q1 of 2024. That said, we remain optimistic that we will see increased demand as we head into the spring and the heart of our nine month selling season. Overall, we believe that Hudson is well positioned for growth and success as the implementation of the AIM Act unfolds. This is an exciting time for Hudson and the industry as a whole, and we remain focused on leveraging our strengths to distinguish ourselves as a leader in this rapidly shifting regulatory landscape to remain focused at the forefront of the transition to next-generation cooling solutions. Now I'll turn the call over to Nat to review the financials guide that.

Thank you, Brian. For the fourth quarter ended December 31st, 2023, Hudson direct recorded revenues of $44.9 million, a decrease of 5% compared to revenues of 47.4 million in the comparable 2022 period. The decrease was primarily related to decreased selling prices for certain refrigerants, offset by slightly higher volume. Gross margin was 31% for the fourth quarter of 2023, slightly lower than fourth quarter 2022 and coming in below our long-term range gross margin target of 35%. As you know, the fourth quarter typically is our lowest refrigerant volume and gross margin quarter SG&A for the fourth quarter of 2023 was 8.5 million compared to $7.5 million in the fourth quarter of 2022. Sg&a has grown as a company, invest more in personnel and IT costs.

We recorded an operating income of 4.7 million in the fourth quarter of 2023 compared to operating income of 7.1 million. In the fourth quarter of 2022, Company recorded net income of $3.9 million, or $0.09 per basic and $0.08 per diluted share in the fourth quarter of 2023 compared to net income of $5.1 million or $0.11 per basic and diluted share in the same period of 2022 for year ended. For the full year ended December 31st, 2023, Hudson reported revenue of 289 million, a decrease of 11% compared to revenues of 325.2 million for full year 2022. The revenue decline was primarily related to decreased selling prices for certain refrigerants. Gross margin for full year 2023 was 39% compared to gross margin of 50% in the prior year period. The margin decrease is primarily related to reduced selling prices and increased cost of refrigerant product, slightly offset by higher margin, DLA and carbon credit sales.

Hudson reported operating income of 78.2 million for full year 2023 compared to operating income of 131.5 million in the prior year. The Company recorded net income of $52.2 million or $1.15 per basic and $1.10 per diluted share in 2023 compared to net income of $103.8 million or $2.31 per basic and $2.20 per diluted share in 2022. Tax expense was 17.6 million in 2023 and 13.4 million in 2022 tax expense was higher in 2023 in 20 $0.22. As we previously stated, the tax benefit related to the deduction of net operating losses declined as we fully utilize these net operating losses in 2022 due to increased profitability. Effective tax rates for future periods are expected to reflect an overall combined federal and state tax rate of 26%, subject to various temporary and permanent differences. As previously announced, Hudson fully paid off its remaining $32.5 million of term loan debt during the third quarter of 2023, resulting from improved performance and increased cash flow.

During the 12 months ended December 31st, 2023, the company generated $58.5 million of cash flow from operations, which was mainly used to pay down term loan debt in 2023. Stockholders' equity improved to $228.8 million at December 31st, 2023 as compared to 174.9 million at December 31st, 2022. Companies availability consisting of cash and revolver availability at December 31st, 2023 was $84 million. As we continue to generate additional cash flow in 2024, we expect to one, ensure we have adequate inventory on hand to review any possible M&A opportunities and three consider potential share buybacks. We have strong liquidity and our revolving loan credit facility provided provides us with a solid financial platform and flexibility as we look forward.

I will now turn the call back over to Brian thinking that 2023 was a strong year for our business and an example of what we could accomplish when we execute on our business strategy and leverage our position as a leading provider of sustainable products and services for the refrigerant and reclamation industry. We are optimistic about our long-term prospects, particularly as the EPA and various states execute on initiatives to promote the growth in reclamation. Operator, we'll now open the call to questions.

(Operator Instructions) Ryan Sigdahl, Craig-Hallum.

A good afternoon, Brian, that Gary. (technical difficulty)

Brian, are you there? Apologies. We seem to have lost Ryan's line one moment. So go ahead, Ryan.

Sorry, can you guys hear me?

Yes. Go ahead.

You're right. I'll maybe start at the beginning. We lost you at some point. Sorry, good afternoon, guys. I just want to start on pricing. I know you said lower, but curious if you could quantify kind of what you're seeing on the R-22 side versus HSC. side and then how that's trended through the quarter and then now through March so Q4 quarter HFC pricing in our 22 pricing were fairly consistent as we updated back in November around that a $10 price and had a slight uptick from what was low probably in Q three. As it relates to 22. We think 22 will remain constant and steady, if you will, our pricing in that, let's say that $30 a pound range that we've talked about before.

It's really early in the year, but a few HFCs, not all we've seen some price pressure on below, let's say, $10 in that eight to 10 price range, but only a handful, not necessarily all of them. So we've not seen this type of break in pricing in the past, but right now, for the moment in a two month view of the 24 selling season. We're seeing a little bit of break in some prices.

Great deal. A Are you willing to quantify what it was in Q4 and you gave the year and then how that compared to prior year. And as it relates to DLA, it was fairly consistent through the year, but we were getting signals that they were going to be buying the types of products that we saw them buy throughout the year that we're now attributing to these additional purchases or surge purchases or nonrecurring purchases that we could be wrong. But we started to see this increase in Q1 of 23. And we know for certain in Q1 24, there will not be any these types of purchases that will be more business as usual or the past volume activities.

It doesn't mean that things could change later in this year. And so we're trying to be cautious and let folks know that possibly about $20 million of the$ 53 million, maybe more nonrecurring then recurring and one more financial SG&A stepped up a little bit more than normal in the quarter, I guess is this new trend? And then what was that incremental spend on specifically in the quarter?

Yes, incremental trend of let's say, incremental spend, what I would say it's more on the personnel and the IT side as we invest more in each of those areas and out. So that's probably closer to the run rate for the future.

Great. Thanks, guys. Good luck.

Thank you.

Thank you.

Josh Nichols, B. Riley.

Yes, thanks for taking my question. And just as a follow-up, I know you mentioned you didn't expect any delays in specific project revenue in 1Q of 24 relative to last year, how much revenue was received for at least project specific DLA revenue in the first quarter of last year? Just trying to get a gauge for that, how much 1Q maybe down quarter over quarter year over year relative to what you did last year, just based on the DLA projects?

Yes. So the deal a increase of let's just say this extra $20 million, possibly, although like I said, it could come up later in the year was fairly even on. So you're talking about something close to, let's say, but not probably not quite $5 million, but close to $5 million. Is that $20 million spread out pretty evenly over the quarters? Appreciate the color on that. And then a pretty big increase in inventory rate for the quarter. I know that and you're probably gearing up for an anticipated increase in reclamation on refrigerants. I'm just curious if you can kind of provide a little bit more color on the ramp up in inventory and what you're seeing there and the expectation as we move through the year, you're really seeing, let's say, that seasonal buying and that you might historically see in the latter part of the year.

So will typically happen is we'll begin the stock-up in Q4 for sales into Q1 and Q2 the following year, you'll typically see the inventory start to come down and then you'll start to see it in the latter part of the year, build back up right now, we don't envision any material dollar increases necessary for inventory through this particular year, and then we will probably end up at the end of next year with about the same total dollars in inventory and in December 2024, as you're seeing at December 2023.

Thanks, Brian. And then last question for me. And you mentioned it, I mean, you've become a debt-free entity. You're generating a bunch of cash rate even with relatively subdued refrigerant prices today, at least on the HFC side, I guess your thoughts on the likelihood of potential M&A opportunities on the near term, are you seeing an increasing pond to fish from so to speak already? Are prices attractive or elevated relative to historic? So I'm just curious for some context.

Yes. I'll start with the on our primary focus as far as use of cash is concerned, is inventory right? In other words, if prices do go up later on the year, we have to govern that first and foremost. But then secondarily, to your point, M&A is definitely interest to us. So we just have to be patient in the right type of acquisition as we've mentioned in the past, we're just not here to roll-up a bunch of acquisitions. We we want to be very smart and very intuitive in terms of the types of benefit that we get from a potential acquisition. And this conclude, it could include customer lists and other things like that, customer relationships and to provide like other types of synergies that we need in our business to help cross-sell.

And maybe just to add one other thing to that, Tom, we have done quite a number of acquisitions over the last 20 years. I would say, though there's a little bit more competition or more dry powder available for private equity, two to complete acquisitions and particularly interest in the H back industry. So we've run into, let's say, more competition or acquisition price pressure because of some of those activities and those funds, we haven't changed our overall view about valuation. And so we hopefully tend to be on the conservative side of valuation when we eventually complete acquisitions.

But we still think we will have an advantage over private equities because I do think we have a particular reputation in the industry. Typically, when we do complete an acquisition, we are looking to keep management and staff on it. So often the people that have the value in that transaction so I think we have some advantage, but there is pricing pressure right now in the market.

Thanks, guys. Appreciate I'll hop back in the queue.

(Operator Instructions) Leanne Hayden, Canaccord.

Hi, everyone. Thanks so much for taking my questions asked. So just to start and to the extent that this is repetitive, I do apologize, I've had some connectivity issues during the call. But regardless and do you expect this year's HFC refrigerated price increases to sufficiently offset the expected $20 million of nonrecurring from?

Yes, I can. So that's a good question. And at the moment, difficult to answer. We're so early in the season. As you can imagine, there's no warm weather. The AC or comfort cooling really drives demand, and we will start to see some increase in that demand in the southern states, Texas, Florida and so forth, hopefully in the near term here. And then once we get into Q2, we'll have no confidence about how we think our 2024 pricing relative to the selling season will look at right now, we don't really have sufficient information to be able to predict what will happen with price generally speaking, we do think that prices would be up in 2024 because of the reduction in the availability of virgin production and consumption.

Okay, right. That makes sense or extension of that. And then just secondly from me, are you able to disclose which classes of refrigerants experienced lower Q4 pricing relative to higher sales volume?

Yes. So sorry that that was the when we are generally today, talking about price, we'll be distinguishing HFC pricing as a complete bucket. But there's about 20 different HFC refrigerants versus, let's say, our 22. So when we were talking about some of the pricing pressure and some refrigerants pricing right now today slightly lower than how we exited last year. We were talking about that HFC. class. As it relates to our 22, we said a little earlier that pretty much the price of 22 stable and around that $30 pound price, all right. Understood.

Got it. Thanks so much. You guys have Good evening.

Thank you. There are no other questions at this time. I would now like to hand the call back to Brian Coleman for closing remarks.

Thank you, operator. I'd like to thank our employees for their continued support and dedication to our business in both our long-time shareholders and those that recently joined us for their support. We look forward to speaking with you after the first quarter results. Have a good night, everybody.

Thank you. This does conclude today's conference. You may disconnect your lines at this time. Have a wonderful day and thank you for your participation.