Good afternoon, ladies and gentlemen, and welcome to the Hudson Technologies Second Quarter 2022 earnings call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, John Nesbett. Sir, the floor is yours.
Thank you, Ali. Good evening, and welcome to our conference call to discuss Hudson Technologies financial results for the second quarter 2022. On the call today are Brian Coleman, President and Chief Executive Officer, and Nat Krishnamurti, Chief Financial Officer. I'll 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, 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 business 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 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 and other factors that could cause the actual results to differ materially. Okay, with that, I will now turn the call over to Brian Coleman. Go ahead, Brian.
Good evening, and thank you for joining us. Our second quarter results show continued strength with substantial revenue growth, significantly enhanced margins, and increased cash flow and profitability. We're seeing consistent momentum as the selling season unfolds, and our second quarter results reflect sustained strength in the price of certain refrigerants. In addition to record revenues for the second quarter of 2022, gross margin increased to 55% as the average selling prices remain consistent with the levels achieved during the first quarter of 2022. At these pricing levels, we've maintained a higher average selling price without material appreciation in the cost basis of certain refrigerants.
During the second quarter, we continued to achieve exceptionally high gross margins, although we believe margin performance for the full year will moderate slightly due to increases in inventory cost and anticipated stabilization in the sales price during the balance of the season. With our visibility today, we've raised our expectations for the full year blended gross margin and believe it will be at least in the mid-40% range, with longer term gross margin settling in around 35%. We remain focused on developing strategic working relationships with customers who recognize the long-term value in Hudson's ability to provide them with sustainable refrigerant products and services as the industry transitions to cleaner equipment and refrigerants. We believe a shared vision for the circular economy of refrigerants is an important component of our customer relationships.
As we discussed before, 2022 marks the start of the industry's compliance with the AIM Act, which mandated a 10% step down in production and consumption allowances for virgin HFCs in both 2022 and 2023, and a 40% baseline reduction in 2024. Additionally, the act mandates a much more aggressive and faster phase down than what we previously saw with the R22 phase out, and promotes the use of reclaimed refrigerants to meet demand as virgin production steps down. HFCs are currently the most commonly used refrigerant, so as a leading reclaimer with the fastest state-of-the-art technology and decades of proprietary knowledge, Hudson is uniquely qualified to position to fill the anticipated HFC supply gap with reclaimed refrigerants as virgin production is phased out.
In addition to the opportunities we're seeing related to the AIM Act, we're also forming new partnerships as certain industry participants are working to comply with initiatives set forth by various states and the federal government. California has led the way with the requirement that OEMs use a minimum 10% reclaimed refrigerant in the factory charged equipment. Many other states are advancing their own set of regulations on the uses for HFCs. Hudson is ideally suited to assist OEMs in meeting these requirements, and we're focused on growing our brand recognition and reach within this audience. Additionally, we're seeing increased from the OEM market, not just at the factory level, but equally important at the field service level as states and the federal government have dealt and continue to deal with chemical reductions and new equipment and servicing rulemakings that will evolve over time.
We just announced a new strategic alliance with Lennox International, whereby Hudson will be the exclusive supplier of certified reclaimed refrigerants to Lennox for the aftermarket support of their residential HVAC systems. This alliance highlights Hudson's capabilities as a resource for our industry partners, and we look forward to expanding our relationships to assist compliance and transition to the use of reclaimed refrigerants by OEMs and others. Hudson has a long and successful history of assisting our industry through prior transitions to more environmentally friendly and efficient next generation cooling equipment and refrigerants. We believe this latest phase down presents us with a tremendous market opportunity to continue to expand our leadership role as a steward of the industry's ongoing transition.
Looking forward, as we reported in this afternoon's press release. Given the pricing dynamics to date for the current selling season, we are increasing our previously stated 2022 forecast and also updating our long-term targets. Based on current pricing levels, we should see revenues in excess of $290 million for the full year 2022. While we continue to believe gross margin performance for the full year will moderate due to increases inventory costs and anticipated stabilization in sales prices during the balance of the season, with our visibility today, we now believe full year blended gross margin will be at least in the mid-40% range. As it relates to the AIM Act implementation, we have seen an accelerated shift to what we expect will be significantly higher sustained profitability for the business going forward.
Assuming further HFC price increases related to HFC phase down and applying a slower pace to price increases than we saw in 2022, we are targeting an annualized revenue of greater than $400 million by 2025, with gross margins remaining above historical levels, but moderating over the next three years to approximately 35%. This shift we're seeing to significantly increase profits for the business provides considerable, considerably enhanced financial flexibility for us to invest in our long-term growth while also continuing to reduce debt. These long-term targets are conservative, and there are certainly factors that may impact such targets. For example, these targets make very modest assumptions on the reclaim front. Conversely, just like everyone else, we are watching the economic signals within our industry and the broader economy as a recessionary environment could potentially create some headwinds.
Thus far, the HVAC aftermarket has stayed very strong, particularly given the mandated phase down, and our industry could potentially be more insulated than other markets, but we're keeping an eye on it. As we move through the completion of our traditional selling season, we remain focused on meeting the needs of our long-standing customers and on continuing to foster and promote sustainable cooling practices. We are committed to providing the products and services to enable our industry-wide transition to cleaner refrigerants and more efficient equipment. As the leading reclaimer, Hudson is uniquely positioned to reduce refrigerant waste and the harmful venting of refrigerants into the atmosphere by driving forward the technology and the incentives that enable our industry partners to recover, reclaim, and reuse refrigerants.
Our EMERALD brand of reclaimed refrigerants is gaining market recognition, and our reclamation capabilities and portfolio of on-site services provide a solid platform for us to grow our leadership role as a steward of environmentally sound, sustainable refrigerant management. This is a pivotal time for our industry and exciting time for our company. As the refrigerant industry continues to evolve, we remain well-positioned with our capabilities and product offerings to meet customer demand for all refrigerant types, including CFCs, HCFCs, HFCs, and next generation HFOs. We are a long-standing participant and proponent of the circular economy of refrigerants, and we believe our historical and consistent role as an industry leader will only grow as our customers and partners seek a seamless transition to more efficient and environmentally friendly cooling systems and refrigerants. Now I'll turn the call over to Nat to review the financials. Go ahead, Nat.
Thank you, Brian. For the second quarter ended June 30, 2022, Hudson recorded revenues of $103.9 million, an increase of 72% compared to revenues of $60.5 million in the comparable 2021 period. The growth was driven by increased selling prices for certain refrigerants during the quarter. Gross margin was 55% for the second quarter of 2022, compared to 36% in the second quarter of 2021. The gross margin increase is mainly due to the significant increase in selling price without a material appreciation in the cost basis of certain refrigerants sold.
While we did achieve 55% gross margin for the first half of the year, mainly due to increased pricing and lower cost, we expect gross margin performance for the full year to moderate to at least the mid-40% range as costs catch up to the stabilized selling price during the second half of the year. SG&A for the second quarter of 2022 was $7 million or 6.7% of revenue, compared to $6.8 million or 11.2% of revenue in the second quarter of 2021. We recorded operating income of $49.8 million in the second quarter of 2022, compared to operating income of $14.4 million in the second quarter of 2021.
The company recorded net income of $39.8 million or $0.89 per basic and $0.84 per diluted share in the second quarter of 2022, compared to net income of $11.3 million or $0.26 per basic and $0.24 per diluted share in the same period of 2021. Net income during the second quarter of 2022 also included a tax benefit of $11.6 million associated with the release of an income tax valuation allowance as a result of increased profitability.
During the second quarter of 2022, the company also paid down an incremental $10 million of term loan debt resulting from improved performance and increased cash flow, thus reducing its leverage ratio to 0.73 to one for the trailing twelve months ended June 30, 2022, declining significantly from a leverage ratio of 4.18 to one for the trailing twelve months ended June 30, 2021. The company's availability consisting of cash and revolver availability at June 30, 2022 was $93 million. As we continue to generate additional cash flow, we expect to, one, further delever our balance sheet. Two, ensure we have adequate inventory on hand. Three, consider other opportunities as they arise. We have strong liquidity, and our term loan and revolving loan credit facilities provide us with a solid financial platform and flexibility as we look forward.
I will now turn the call back over to Brian.
Thanks, Nat. We're pleased with our strong performance thus far in the 2022 selling season, and we believe we're well positioned for continued growth as we capitalize on the market opportunities to enhance our leading role as a provider of sustainable products and services for the refrigerant and reclamation industry. Operator, we'll now open the call to questions.
Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star one on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold while we poll for questions. Thank you. Your first question is coming from Ryan Sigdahl. Sir, please state your affiliation and pose your question.
Good afternoon, guys. Nice result.
Thank you, Ryan. You phased out for a second. Are you still there?
I am. Can you hear me?
Oh, yeah, that's better. Sorry.
Good. Wanna start with gross margins, obviously, extremely impressive in the quarter and year to date. We know there's some transitory price benefit flowing through the gross margin line, but it feels like, you know, that would have been bigger the last two quarters than it would have here. It seems like structural or normal kinda gross margins ex that price were well better this quarter. I guess, can you break out how much was from the price increase versus what you would call structural or normal gross margin within that 55%?
It's probably difficult to try to bifurcate it, but certainly when you go back, let's say, over the last six months, as we went through Q1, there were further price increases through Q1 itself, and we reported pricing in last earnings call for HFCs on average around $14 a pound. That $14 basically was consistent throughout the entire second quarter, and that's consistent today. At some level, Q2 had the benefit of that higher price throughout the entire period, whereas Q1 would not have. As it related to our overall inventory cost, there really wasn't as much of an increase in the cost basis of our sales as we thought we might have seen. As a result, we ended up with the gross margins reflected in today's press release.
Maybe looking out further, Brian, 2025 targets, 35% gross margin historically. You've always talked about kinda 30% as the normal gross margin, and that was what your 2024 targets were. I guess what's giving you confidence to raise that by five points?
It's relying on reclaim, certainly. Some growth in reclaim, but I'd say we're using a very conservative growth in reclaim. We're not even reflecting reclaim volumes that would reach the height of the R-22 HCFC phase out, but getting close to that. We just are, you know, believing that we will see price increases from where we are today. We certainly don't know how the overall economy could affect short-term results. On a long-term basis, when you get into that 2024 period and a 40% reduction in the overall annual availability of HFCs, you would have to expect to the extent there was any inventory coming into the AIM Act or using the other expression of stockpile coming into the AIM Act, that through that period, it would be consumed.
Certainly, by 2025, possibly sooner, we really would start to see tightness in a normal economic balance of supply demand with anticipated price increases, certainly increases from the levels we're at today.
Maybe following up on that. Sounds like channel inventory is still pretty tight, but can you comment on both R-22 as well as HFCs, what you see as far as channel inventory? Secondly, can you comment on reclamation growth or how that has trended on each of those categories?
As it relates to R-22 in pricing, it still remains pretty constant and probably will remain constant for the foreseeable future. The sale price is, you know, in the low $30s, mid-$30s. We would at this point not expect people to carry 22 inventory down the chain. We would expect that people are just buying 22 as they need it, and we'll continue that pattern and expectation for, again, the foreseeable future. No changes there and wouldn't expect to see changes for, you know, several years to come. As it relates to HFCs, there could be a little bit more inventory in the chain than normal. We're not certain if some buyers could have thought about, let's say, having a little bit more inventory now in anticipation of 2023 and 2024.
We don't think it's overly material, but we're not certain as to what that level is. We would think it might be a little bit higher HFC inventory in the chain or downstream. Was there a third part to that?
Reclaim.
Reclaim continues to be somewhat disappointing. Now I will say it's still early in the contractor mind that HFC has a value, and when I say early in Q2. Q2 would probably be the first time that a contractor could have heard that they would be paid for HFC refrigerants, whereas last season and for decades, they likely were charged. We do think, as we've said before, with regards to reclaim, that reclaim typically picks up on the back half of the season as the contractors are going through their busy season on repairs. They start to accumulate recovered gas and then start to send it in towards the back end. This then points really to the importance of the Lennox announcement.
This is a new initiative that Lennox is really taking a very big, bold step in trying to reach out to the Lennox dealers and encourage them to recover refrigerants that they might not have previously done or not previously returned to Hudson Technologies as the preferred reclaimer. This is very significant for us. I mean, we're talking about multiple thousands of potential dealers in their programs, and it's one step, I think, towards a way commercially participants in this industry can really support that circular economy. We all share in the environmental benefits of recovery, which is the only means of reducing emissions, and then the reuse of that refrigerant. This is a very significant relationship, and we're looking forward to working with Lennox International and the Lennox dealers.
Maybe last question from me, just following up on the Lennox. What type of exposure business do you have with Lennox or I guess those, you know, thousands of deals at Lennox authorized dealers today? Any math or I guess rough numbers you could lay out of what type of incrementals this could be for Hudson?
Well, all of it ought to be incremental. There's likely very little direct relationship we have with the Lennox dealers. Certainly, the way Lennox is promoting this program, they're taking it very seriously at all of their events, and putting forth the importance of this program not only for today but for the long term. It would be difficult at the moment to quantify the overall benefit. At the end of the day, as you know, all recovered refrigerant that we reclaim goes into inventory and is resold. It gets, you know, part of that blended overall gross margin, which for the moment we're targeting that longer term gross profit range at that mid 35% above what we were previously targeting at the low 30% range.
Great. Thanks, guys. Good luck.
Thank you.
Thank you. Our next question is coming from Chip Moore. Please state your affiliation and pose your question.
Thanks, good evening, and congratulations on the continued strong results. I wanted to ask about the outlook, I guess, for this year, more on the volume expectation side. $290 million, you know, would imply at the low end, not, you know, not a lot of top-line growth in the back half of the year. Are you maybe being conservative on pricing or, you know, labor and part shortages throughout the industry? Or just what are some of the puts and takes on that revenue estimate?
I would say, historically, any of the estimates that we provide are always tended to be on the conservative side, intended to try and just reflect status quo. Obviously, we're focused on growing relationships, particularly the strategic relationships we've talked about, and we'll continue to do that. Some of those relationships will be public, some will not. Typically any forward-looking information we provide, we would tend to do so in a very conservative way.
Perfect. Understood. One more on the outlook. You know, as we look to 2025 and that path to mid-30% margins. I think you talked about being pretty conservative on reclaimed. Just based on the phase down, how would you think about that path? Would it be more of a step change or a steady increase or any thoughts there?
We've seen, you know, periods of ups and downs, obviously. Whenever we look at prices over long periods of time, there has been more of a sawtooth blade than a direct, you know, linear line from one number to another. With that said, we definitely believe the estimates for the 2025 pricing are conservative. We definitely think they're, you know, significantly lower than what you might expect when you get into a real supply-demand tightness on product. But also what we don't even touch upon when we think about this is what are the future opportunities? We're generating a significant amount of excess cash. Nat and the team negotiated the ability to pay down the debt this year. As reported, we paid down some debt in Q2.
We expect to continue to do that through the balance of the year. We do expect that debt could go to zero by certainly 2024. We'll have cash flow available to look at acquisitions and other targets for investment in the business. I believe we said this before, the AIM Act comes with some difficulties. It comes with difficulties about reporting. This year we're already making significant investments in our ERP system to capture the requirements that the EPA has put forth under the AIM Act for reporting both on the outbound sale of product, but also on the inbound and return. Relative to the AIM Act currently as drafted, there's going to be a requirement for reusable cylinders. That's gonna also require significant investment. We think that there's gonna be further disruption.
We believe there's gonna be further consolidation, and we think that will be opportunities for us to execute with excess cash flow into that period of time that we're targeting. Again, I think the target is a conservative target and achievable based on either guidance if you look at the European market or what the opportunities are for us ahead.
That's very helpful, Brian. Maybe one follow-up there on sort of the acquisition side with this strong profitability you're seeing and then opening up some flexibility. Just maybe you can talk about the pipeline or what you're seeing. Obviously, we saw one of your competitors scoop up an asset in Florida. Would you be looking at those type of deals or more broad-based? Any color there? Thanks.
Yeah. I mean, as it relates to reclamation and reclaimers in general, there possibly will be folks that are gonna exit the business because of some of the difficulties I described. There's certainly folks that we would think would be good partners and maybe others that might not be. And also we do think there's a tremendous opportunity on the service side. You know, when we first started to think about service and take our patented equipment into the field, so the equipment we use to reclaim refrigerants in our plants is also very portable. We started to create these various services at the middle end of the CFC conversions.
When you look back now, we have quite a lot of data, quite a lot of relationship with the OEM service groups, end users that are now operating on HFC, such as R-134a, for example, that over the next five-15 years, they're gonna have to look to find ways to convert those systems to HFO or next generation technologies. We think we have a very significant solution for those conversions, not only to help in the conversion, but more importantly or just as importantly, to pay for the recovered gas that subsidizes that new equipment. We do think the service area, particularly on the larger systems, is an opportunity for growth for us as well.
Great. I appreciate it. Thanks very much.
Thank you.
Once again, if there are any remaining questions or comments, please press star one on your phone at this time. Our next question is coming from Gerry Sweeney. Sir, please state your affiliation and pose your question.
Roth Capital. Hey, Brian. Thanks for taking my call.
Hey, Gerry. How are you? Good evening.
Good. Thanks, Brian. Just speaking on the, I guess, acquisition. Well, taking a little bit of a step back. You know, you mentioned reclaim is still a little bit disappointing, and that's. We saw a little trouble with that with R-22. I think you sort of were touching upon this, but in some of your questions and answers earlier, but you know, is there an opportunity to get larger or more entrenched on the service side, either acquisition or building out, getting closer to the gas, give you an opportunity to reclaim it? You know, and if yes, like, how do we go about doing that if that's something you're looking at?
Yeah. The answer is definitely yes. Being close with contractors makes a lot of sense. When you think about the announcement with Lennox, it's difficult for us to add value in the process of residential applications. The systems are just too small. On the flip side, when you talk about large commercial, industrial, that's the sweet spot for our services. There's a different set of contractors typically that will work on those larger systems versus, let's say, the residential light commercial. It's a two-pronged approach to the marketplace. Finding excellent partners like Lennox International helps us with the residential side.
Working also with the large, OEM chiller groups, some of which eventually may have needs for reclaim in the factory charge as well, I think will help us enhance our recovery rate and growth in reclamation as we move forward.
Okay. On the Lennox side, is there any for lack of a better term or words like teeth in that from Lennox's side with dealing with some other dealers? Like, maybe around the warranty. You know, if you use an outside or non-approved recycled refrigerant, you know, it voids the warranty or anything like that can really push additional business your way.
Well, you know, really wanna look at Lennox's messaging. They are very serious about sustainability. They're also very serious to ensure that their equipment that's in the installed base will be serviceable to its end of life. They're taking the responsibility as an equipment manufacturer very seriously to ensure that there will be supply to meet the servicing needs of the installed base. I think there's lots of teeth in what they're looking for. It's part of their mission. We would expect there to be significant growth as a result of this relationship.
Got it. Final question is just utilization capacity. You know, I understand that maybe reclaim hasn't been as strong as you would like, but you know, there are some inherent challenges, I think, with HFC gas than R-22. You know, HFC is a, you know, R-22 is a single molecule, HFCs aren't. Do you have enough capacity to handle HFCs or especially mixed HFCs, you know, as you look out the next couple years? Or is there a need or requirement to build out some of that capacity side?
We've been fractionally distilling refrigerants since about 1995. We probably have, you know, within our organization, you know, the greatest proprietary knowledge about fractional distillation refrigerants. Back to capacity, we're constantly adding capacity, because as we saw the introduction of HFCs into the HCFC applications like the R-22 and R-410A, we were starting to see increases in cross 410A or cross 22 because at times R-410A was mixed with that. We've been seeing, let's say, increases in cross-contamination, you know, for probably well over a decade now. Inherent in our annual CapEx spend has been dollars devoted to support that need, and we'll continue to do that. At the end of the day, most of our CapEx needs or spends are really about just handling cylinders.
Again, try and equate what we're looking to do with the propane industry, particularly in the late nineties when they started the exchange programs and being able to handle many more cylinders coming in the door. Our relationship for our customers are to return empty cylinders in approximately two business days. We're trying to help them manage their overall steel, inventory or steel fleet, while also promoting the recovery and reuse of refrigerants. At the end of the day, we feel confident that our current capacity and any future dollars spent for capacity will not be materially different than what you've seen historically, because historically we've had to deal with these problems.
Okay. Got it. I appreciate it. Thanks for making time for my call.
Thank you, too.
Sirs, there appear to be no more questions in the queue. At this time, I will turn it back to you.
Well, thank you, operator. I'd like to thank our employees for their continued support and dedication to our business. I wanna again thank our longtime shareholders and those that have recently joined us for their support. Thank you everyone for participating in today's conference call, and we look forward to speaking with you after the third quarter. Have a good night, everybody.