Hudson Technologies(HDSN) - 2022 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Hudson Technologies reported revenue of $103.9 million for Q2 2022, a 72% increase compared to $60.5 million in Q2 2021, driven by increased selling prices for certain refrigerants [24] - Gross margin increased to 55% in Q2 2022 from 36% in Q2 2021, primarily due to significant price increases without a material rise in the cost basis of refrigerants sold [25] - Operating income for Q2 2022 was $49.8 million, compared to $14.4 million in Q2 2021, while net income rose to $39.8 million or $0.89 per basic share, up from $11.3 million or $0.26 per basic share in the same period of 2021 [26] - The company reduced its leverage ratio to 0.73:1 for the trailing 12 months ended June 30, 2022, down from 4.18:1 a year earlier [27] Business Line Data and Key Metrics Changes - The company achieved exceptionally high gross margins, although it anticipates a slight moderation in margin performance for the full year due to rising inventory costs and stabilization in sales prices [8] - Hudson's EMERALD brand of reclaimed refrigerants is gaining market recognition, contributing to its leadership role in sustainable refrigerant management [21] Market Data and Key Metrics Changes - The AIM Act mandates a 10% step-down in production and consumption allowances for virgin HFCs in 2022 and 2023, with a 40% baseline reduction in 2024, creating opportunities for reclaimed refrigerants [10] - The company is forming new partnerships to comply with various state and federal regulations, particularly in California, which requires a minimum of 10% reclaimed refrigerant in factory-charged equipment [12] Company Strategy and Development Direction - Hudson Technologies is focused on developing strategic relationships with customers to provide sustainable refrigerant products and services as the industry transitions to cleaner equipment [9] - The company aims to increase annualized revenue to over $400 million by 2025, with gross margins expected to settle around 35% [16] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the HVAC aftermarket's strength despite potential recessionary headwinds, noting that the mandated phasedown of HFCs could insulate the industry [18] - The company is committed to fostering sustainable cooling practices and providing products and services to support the transition to cleaner refrigerants [19] Other Important Information - Hudson Technologies paid down an additional $10 million of term loan debt in Q2 2022, resulting in strong liquidity with $93 million in cash and revolver availability [28] - The company is investing in its ERP system to meet the reporting requirements of the AIM Act, which may lead to further disruptions [56] Q&A Session Summary Question: Can you break out how much was from the price increase versus structural or normal gross margin within that 55%? - Management indicated it is difficult to bifurcate the gross margin but noted that the higher price throughout Q2 contributed significantly to the gross margins achieved [39] Question: What are your thoughts on channel inventory for R-22 and HFCs? - Management stated that R-22 pricing remains constant, with expectations that people will buy as needed, while there may be slightly more HFC inventory in the chain than normal [43][44] Question: Can you comment on the reclamation growth trend? - Management noted that reclamation has been somewhat disappointing but expects it to pick up in the latter half of the season as contractors accumulate recover gas [46] Question: What type of exposure does Hudson have with Lennox and potential incremental business? - Management indicated that all business with Lennox should be incremental, as there is likely little direct relationship with Lennox dealers currently [50] Question: How do you see the path to mid-30% margins by 2025? - Management believes the targets are conservative and achievable, with expectations of significant cash flow available for acquisitions and investments in the business [54][56] Question: Do you have enough capacity to handle HFCs, especially mixed HFCs? - Management expressed confidence in their current capacity and ongoing investments to handle the complexities of HFCs, ensuring they can meet future demands [68]