Good afternoon, everyone, and welcome to today's Hudson Technologies Third Quarter 2022 Earnings Call. It is now my pleasure to hand it over to your host, John Nesbett of IMS Investor Relations. John, please take it away.

Thank you, Tom. Good evening and welcome to our conference call to discuss Hudson Technologies' financial results for the third quarter 2022. On the call are Brian Coleman, President and Chief Executive Officer; and Nat Krishnamurti, Chief Financial Officer. I'll now 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 or perceptions 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 those 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 and of the factors that could cause our actual results to differ materially. Okay. With that, I will turn the call over to Brian Coleman. Go ahead, Brian.

Good evening and thank you for joining us. Our third quarter delivered a strong close to our 2022 selling season, reflected record revenues, improved margins and enhanced profitability. During the third quarter, we continued to benefit from sustained strength in the pricing of certain refrigerants. In addition to delivering our third quarter of record revenue performance, we achieved gross margins of 49% in the quarter, a significant improvement when compared to gross margin in the third quarter of 2021. However, as expected, gross margin moderated sequentially as compared to the first and second quarters of this year as we began to see less of a gap between the inventory cost and sale price. As we enter the fourth quarter, which is seasonally our weakest quarter, we are focused on maintaining our existing strategic relationships and adding new customers who share our vision of the circular economy of refrigerants. Hudson is a longtime industry leader in the facilitation and adoption of sustainable refrigerant management and we are delivering on the efforts to attract partners who are similarly committed. In addition to our traditional sales activities, we're also heightening the market recognition of sustainable products, services and consultation capabilities through our participation at industry events. In mid-September, we exhibited at The Food Industry Association's Energy and Store Development Conference which focused on retail food, energy use and management, HVAC and refrigeration and sustainability. In October, Hudson presented a continuing education webinar around the AIM Act phasedowns and the importance of reclamation which was sponsored by the industry news magazine, ACHR News. With almost 500 live attendees, we anticipate several more interviews from registered participants. This week, we're exhibiting at the Greenbuild International Conference and Expo, introducing our products to attendees focused on creating greener buildings and communities throughout the use of sustainable solutions. Next week, we'll be at the Institute of Heating and Air Conditioning Industry trade show. IHACI is a California HVAC industry organization focused on contractor training and with California's role as an early adopter for certain reclamation activities. We look forward to showcasing our capabilities there. As an industry veteran, we're aggressively pursuing opportunities to share our more than 30 years of experience and expertise to provide alternatives and thought leadership as our industry continues to transition to next-generation refrigerants. As you know, that transition has begun in earnest with the start of the industry's compliance with the AIM Act this year. To recap, the AIM Act mandates a 10% step-down in the production and consumption analysis for virgin HFCs in both 2022 and 2023 and a 40% baseline reduction in 2024. The Act mandates a much faster and more aggressive phasedown than what was undertaken with the R-22 phase-out a few years ago. It promotes the use of reclaimed refrigerants to meet demand as virgin production steps down. While the move to reclaimed refrigerant use won't happen overnight, the estimated install base of HFC units was more than 100 million in 2020. So as the leading reclaimer with the fastest state-of-the-art technology and decades of proprietary knowledge, Hudson is uniquely positioned to fill the anticipated HFC supply gap with reclaimed refrigerants as virgin production is phased down. Moreover, the EPA just issued the post-allocation rule covering the 2024 to '28 phasedown period with a mandated 40% reduction for the original baseline. Parallel to the opportunities related to the AIM Act, we're working to establish partnerships in response to compliance and issues being proposed by certain states, as well as the federal government. For example, we've spoken a great deal about regulations in California which require OEMs to use a minimum of 10% reclaimed refrigerant in factory charged equipment. In the past year, we've announced partnerships with AprilAire and Lennox, whereby Hudson will supply the reclaimed refrigerant needs for their new equipment. Likewise, there are many other states evaluating moving forward on regulations requiring the use of reclaimed HFCs. We believe there's a tremendous opportunity for us to grow our business as we help customers navigate the current and future regulatory environment. As the leader in reclaiming in the United States with an estimated 35% market share, we are well-positioned to supply reclaimed refrigerant to the installed base of equipment as virgin HFC production is phased out and also as a supplier for new equipment at the OEM level. We have decades of experience and several prior refrigerant phase-outs under our belts. We're looking forward to playing a leadership role as this most recent refrigerant evolution continues. Proper cooling and refrigeration systems are essential to day-to-day life. These systems have a long life expectancy. Therefore, the orderly transition to lower GWP refrigerants and equipment will rely for some time on the availability of reclaimed HFCs to bridge the reduction in virgin supply. We remain committed to providing the products and services to enable an industry-wide transition to next-generation refrigerants and more efficient equipment. As the leading reclaimer, Hudson has the capability to reduce refrigerant waste and the harmful venting of refrigerants into the atmosphere by driving forward the technology and incentives that enable our industry partners to recover, reclaim and reuse refrigerants. We're pleased to have delivered exceptionally strong performance in the third quarter and for the 9 months selling season. As we move through the close of 2022 and on to 2023, we, along with the rest of our industry, are keeping a close watch on the economy. While comfort cooling and refrigeration can likely remain more insulated from the worst of a recessionary environment, an economic downturn isn't a positive development for anyone. Hudson is uniquely positioned with proprietary reclamation technology, longstanding customer relationships and a proven distribution model to continue driving our leadership role in the circular economy of refrigerants. We remain focused on leveraging our strengths to grow our business while also facilitating the transition to next-gen cooling alternatives. Now, I'll turn the call over to Nat to review the financials. Go ahead, Nat.

Thank you, Brian. For the third quarter ended September 30, 2022, Hudson recorded revenues of $89.5 million, an increase of 48% compared to revenues of $60.6 million in the comparable 2021 period. The growth was driven by increased selling prices for certain refrigerants during the quarter. Gross margin was 49% for the third quarter of 2022, compared to 39% in the third 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. As expected, we saw a moderation in gross margin sequentially in the third quarter, compared to the second quarter of 2022 as the gap between inventory cost and sales price narrowed. SG&A for the third quarter of 2022 was $7.2 million or 8% of revenue compared to $6.1 million or 10% of revenues in the third quarter of 2021. We recorded operating income of $36.3 million in the third quarter of 2022, compared to operating income of $16.9 million in the third quarter of 2021. The company recorded net income of $29.4 million, or $0.65 per basic and $0.62 per diluted share in the third quarter of 2022, compared to net income of $15.9 million, or $0.36 per basic and $0.34 per diluted share in the same period of 2021. Net income during the third quarter of 2022 included a tax benefit of $2.8 million associated with the release of an income tax valuation allowance as a result of increased profitability. During the third quarter of 2022, the company paid down an incremental $31 million of term loan debt, resulting from improved performance and increased cash flow, thus reducing its leverage ratio to 0.41:1 for the trailing 12 months ended September 30, 2022, declining significantly from a leverage ratio of 2.35:1 for the trailing 12 months ended September 30, 2021. During the 9 months ended September 30, 2022, the company generated $60 million of cash flow from operations which was mainly used to pay down term loan debt that now includes higher interest rates. Throughout this time, we have not needed to borrow against our revolver loan which allows us even greater financial and operational flexibility. The company's availability consisting of cash and revolver availability at September 30, 2022, was $87 million. As we continue to generate additional cash flow into 2023, we expect to, one, further de-lever our balance sheet; two, ensure we have adequate inventory on hand; and 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. Our 2022 selling season was very strong. We are focused on using the offseason to prepare for what we believe will continue to be a very receptive market for our products and services. We look forward to continuing to drive the momentum we built and to growing our leadership position as a provider of sustainable products and services for the refrigerant and reclamation industry. Operator, we'll now open the call to questions.

And the first question today is coming from Ryan Sigdahl from Craig-Hallum Group.

I want to start with pricing. So strong pricing, obviously, throughout this whole selling season, favorable dynamics. Curious what you’re seeing currently how the season ended? And maybe if that portends anything towards what you expect kind of the start of the next selling season next year?

Yes. We’ve noticed a slight decline in sales prices, particularly in some segments towards the end of the third quarter, likely under 10%. We believe this is due to the fact that this is the first year where producers with consumption allowances and importers were a bit cautious about the products they made available at the beginning of the year to avoid running out. This caution may have led them to find themselves with more availability in the latter half of the year. Therefore, I don’t think this impacts our current or long-term outlook on pricing. We anticipate prices will rise over time. We see this situation as simply the first year of people trying to manage their allowances and determine how and when to use them.

And moving over to reclamation, have you seen any uptick in volume kind of once we get towards the tail end? It’s more reclamation timing. Have you seen any change in contractor behavior, willing and able to capture more gas, returning dirty gas, et cetera, relative to past seasons?

Again, right now, it's surprisingly slow growth because we are paying more money now. As it relates to wholesaler activities, they still continue. Often, a large majority continue to charge the contractors. I think the relationship that we created this year with Lennox, which has probably over 3,000 dealers which are contractors, is the first big step for Hudson to go direct to the contractor to try and provide them with sufficient economics to comply with the law and to increase the returns to refrigerants. We are seeing some benefit from that Lennox relationship. But on an overall basis, we're still, let's say, on an overall basis disappointed with the rate by which reclamation is growing. Now, we've participated in a white paper with three NGOs and another reclaimer and provided some guidance and recommendations for programs that the EPA could support to enhance the growth of reclamation. We believe that sometime probably by mid-next year, we should see a rule from the EPA around refrigerant management and programs to promote the growth of reclamation. We think it's going to be a little late in terms of timing to help offset what we think is going to be severe availability in 2024 relative to the 40% reduction in HFC virgin allowances. So we're moving forward, I'd say, slowly towards our objectives. We're seeing some, I'd say, small signs of positive movement.

One more for me. With the California regulation change that you mentioned requiring part reclaimed gas in original equipment here starting in 2 months and ‘23. How well prepared do you think OEMs are? How educated, prepared with the relationships, access to reclaimed gas, et cetera, do you think they are?

It's difficult to answer that without being inside any of these organizations. They certainly are aware of the issues. Most would have participated in activities sponsored by a trade organization called AHRI and its negotiation with the state of California. The 2022 year provided an opportunity for early adoption but the regulation itself is not effective until next year. So how any of the OEMs are going to treat the requirements next year versus this year, it's difficult to say but I would say that it appears that there were very few early adopters.

And the next question is coming from Gerry Sweeney from ROTH Capital.

I wanted to focus on collections, as that’s a key area for our model. You mentioned Lennox, which has 3,000 dealers or potential contractors. Is there anything more you can do to make it easier for these 3,000 contractors to access products? Could there be a mail-back program for canisters? I understand there may be some regulations surrounding that, but I'm curious about your thoughts on how to simplify the process for contractors, not just Lennox but potentially others as well.

Yes. I mean, that's a very good question. We have spent recently a fair amount of time trying to get voice of the customer, asking a lot of questions of contractors or pain points, including the trade organization, AHRI, which has put together some surveys in different places of the channel about what might be perceived barriers to recovery and reclamation. We are trying to not create any one program. What we are trying to do is listen to the contractors and try to help with whatever problems they may have. Do they have a loading dock, do they not? Do they palletize, do they not? Do they want to bulk up or not? So we're trying not to have one program or one offering. We have to date chosen not to go and create a pickup program for contractors. There are some folks in our industry that have done that. We’ve never found that approach to the market to be economically viable. It's certainly marginal. So what we're really trying to do is find ways to use LTL or other means to get to these contractors and avoid building up an infrastructure of trucks and then driving around to pick up at local locations.

I understand. I might have a suggestion for you later. There are others in the industry who engage in that practice, but I appreciate the insight. Regarding inventory, there's a significant drop expected in 2024. How are you approaching inventory not just for this year or next, but considering we have about 14 to 16 months before the 2024 selling season? Is this the right time to increase inventory? Have you made any decisions or have any thoughts on that subject?

So sorry, Gerry, are you asking Hudson's view on Hudson's carrying volumes?

Yes. That’s correct.

So we certainly were hurt when we did the Airgas acquisition with a multiyear stockpile of product and a price correction. Prior to 2017, we generally saw wholesalers stocking inventory in Q1, reloading in Q2, and not buying a whole lot towards the end of the season in Q3. Simultaneously around the time of the acquisition, we saw the purchasing pattern change by those wholesalers. To date, we don't see a lot of wholesalers buying large volumes in Q1. They certainly buy in Q1 but not to the extent that they might have in the past. We made a decision, I'm not sure when we started to affect that decision. But let's say, in 2019, sometime in 2019, going forward that we weren't going to carry as much inventory volumes, and we're sticking to that plan. We certainly don't know what next year's economy could bring. As you know, the thing that we really care about most as a headwind is cool weather. You don't know if you'll have a cool spring. We are always trying to be a little cautious with the amount of inventory we carry. Now the dollars have been increasing in inventory mainly because cost per unit has gone up, not so much the overall volume of product.

That's fair. On that note, R-22 has been phased out. HFCs are now the new standard and have been well-established. This leads me to my next question. I'm not aware of any alternatives available. I'm curious if anything has emerged. I don't believe there is a way to create an alternative for HFCs, but I'd like to hear your thoughts on that.

So I think we've covered there are several different pieces to this AIM Act and why the AIM Act and HFC reductions really do not look anything like the prior phase-outs. One of the important pieces to this is what you just touched on that at the end of the day, there's a CO2 equivalent phasedown of HFC production, not a product-by-product phase-down or phase-out. What we think will happen is people and OEMs over time and we're still waiting for a lot of building codes to change to allow this to happen, are going to manufacture lower GWP refrigerants. If you take something like R-410A, it has a little over 2001 CO2 equivalent. It's the most widely used HFC today, but using allowances to produce R-410A is not sustainable when you have these severe cuts. Therefore, people will be converting to lower GWP products. We haven't seen any lower GWP products that might constitute a drop-in. We haven’t seen any technology, per se, that you could argue would help run an R-410A unit with some other HFO replacement or whatever category you talk about. We're really talking about over maybe 100 million to 120 million stationary units that will have to likely convert to something new over the next 5 to 15 to 20 years. Technology can change. I don't know what 15 years from now will bring. But right now, we don't see the same view or approach to drop-ins as you saw with ODS systems that were allowed to be replaced or converted with HFC systems. So sorry for the long answer.

Yes, I believe it's important for everyone to understand that HFO systems have different flammability characteristics, which will necessitate changes to building codes. In contrast, transitioning to a system using HFCs may involve more flammable HFOs and also requires updates to building codes. There are various steps that must be taken before a potential transition can happen.

Yes, the building codes are expected to catch up, likely by 2024 or 2025. Additionally, while not all HFOs contain HFCs, some do use HFCs as components. This will lead to important decisions for producers with consumption allowances, such as whether they will produce HFCs for the aftermarket or for use in HFOs. It’s also possible that they may consider working with a reclaimer to increase their HFC supply to expand the HFO business.

That’s it. I’ll jump back in line. I asked enough and took up enough time.

Your next question is coming from Chip Moore at EF Hutton.

Hello. Brian and Nat, thank you for addressing my question. Regarding collections, the reclaimed rates are still somewhat disappointing as you mentioned. I am curious about your outlook for growth in that area and the supply growth mix for next year’s selling season. Do you believe we need to see the EPA rule in place to see a significant improvement? How should we approach this for next year's selling season?

Most of the reclamation that we receive, let's say, this year will be utilized next year. So growth in reclamation activities in the 2023 season, in some respects, will benefit 2024, because most of the used gas that you bring in the back half of the year around this time of the year, more so than the first four months of the year. As it relates to the opportunity, if you take HFC 410A, right now, the reclaim volumes of HFC 410A are only about 25% of what the peak reclaim volumes were for R-22. If somehow which we don't believe, but somehow the AIM Act and the implementation of the phase-out is similar to ODS, then you have at least a fourfold growth in the opportunity of HFC reclamation from where we are today. But there are added elements to allow for reclamation to grow much more significantly. One is, as I briefly mentioned, we participated in white papers and have put forth some ideas for the EPA to create programs to promote the growth of reclamation. In fact, there will be a rule-making likely in the middle of next year that will address this. This will be the first time. There was no promulgation of regulations by the EPA with the prior phase-outs to support the growth in reclamation. The commercial side might be the most important piece. We believe OEMs are going to back and support recovery and reuse. We think they have to, in some respect, to meet their obligations. We do think chemical producers will also likely participate as it will likely benefit their ability to grow their HFO productions. We feel there's tremendous upside on where we are. It's just that we're disappointed at the pace of growth. But we do think there'll be three drivers to help stimulate that growth, whereas all we had with the prior phase-outs were simply those who made the law and drove the speed limit for those who did the recovery.

And maybe one more. Any help you can give us on the outlook? Obviously, you’re running well ahead of the targets you laid out for this year. Any color on Q4, whether it’s margins or otherwise? I assume you still feel very good about 2025 but I just want to confirm that.

Yes, we remain confident about our long-term forecasts and projections. We anticipate that Q4 of 2022 will reflect a similar pattern to Q4 of 2021, where we observed a notable increase in gross margins compared to historical levels. As noted in Q3 of this year, we are experiencing a moderation in gross margins, which aligns with our expectations that costs will start to catch up. We believe Q4 of 2022 will closely resemble Q4 of 2021. Our long-term projections continue to be conservative, and we are optimistic about reaching those targets.

Confirming that’s sort of similar top line but you think margins could be in that 40% plus range for Q4.

Yes, something in that range. Like I said, it's likely a similarity when you get to the operating line.

This does conclude today's Q&A session. I would now like to hand the floor back to management for closing remarks.

Thank you, operator. I’d like to thank our employees for their continued support and dedication to our business and to our successes here with our record performance. I want to again thank our long-time shareholders and those who recently joined us for their support. Thank you, everyone, for participating in today’s conference call. I hope everyone has a happy and safe holiday season and we look forward to speaking with you after fourth quarter results. Have a good night, everybody.

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