Greetings. Welcome to the Hudson Technologies' First Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, John Nesbett of IMS Investor Relations. You may begin.

Thank you. Good evening and welcome to our conference call to discuss Hudson Technologies' financial results for the first quarter 2023. 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 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 those elements can change, 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 actual results to differ materially. With that, I will now turn the call over to Brian Coleman. Go ahead, Brian.

Good evening and thank you for joining us. 2023 is off to a solid start and in line with our long-term target expectations. As you know, the 2022 selling season was exceptional due to sale prices rising at a much faster pace than inventory cost, which creates a tough quarter-to-quarter comparison. Our first quarter results reflect this dynamic, with revenues down slightly due to a combination of lower selling prices for certain refrigerants as well as a decrease in demand compared to the first quarter of 2022. It's not unusual for us to see pricing pressure in light of volume in the first quarter of any year since during the January through March time period, large portions of the country are still facing winter weather and are not yet thinking about turning on air conditioning systems. This is why we think it's more important to view and evaluate our performance over the full nine-month selling season rather than on a quarter-to-quarter basis. Looking at the bottom line, we reported strong profitability and operating cash flows during the first quarter of 2023. As we expected, gross margins have begun to moderate as the gap between inventory costs and sale prices narrows. While the first quarter margin of 39% came in ahead of our long-range target of 35%. From a regulatory perspective for 2023, the continued 10% step down in Virgin HFC production and consumption allowances mandated by the AIM Act remains in place. As we've cited on previous calls, in 2024 a 40% baseline reduction in Virgin HFCs begins, and we believe the aggressive phasedown schedule will benefit our business by driving higher demand for our reclaimed refrigerants as Virgin HFCs become constrained. There is an estimated install base of over 125 million HFC units, and we believe that the ongoing step down in HFC production and consumption allowances mandated by the AIM Act will benefit our business. Additionally, we anticipate that heightened regulatory and reporting initiatives could drive consolidation in our industry and provide acquisition opportunities as certain of our competitors may struggle with these new requirements. Long-term, we see a tremendous opportunity for the increased use of reclaimed refrigerants for many reasons, including industry stakeholders beginning to embrace the environmental benefits of using reclaimed refrigerant, which is nearly a zero GWP gas, and federal and state legislation is expected to increase mandates in the use of recovered and reclaimed refrigerants. With this in mind, we are focused on cultivating a customer base that encompasses industry participants who share our vision of the circular economy for refrigerants. As the Virgin HFC supply is limited, the commitment to recovering and reclaiming refrigerant becomes even more important. So we will continue to seek customers who share our vision for the adoption of sustainable and responsible refrigerant management. We continue our efforts to promote our sustainable products, services, and consultation capabilities to the marketplace. Earlier this week, we announced that Hudson has become a chemical producer partner in the EPA's GreenChill Advanced Refrigeration Partnership Program. GreenChill is a voluntary partnership that works with the food retail industry to reduce refrigerant emissions and decrease their impact on the ozone layer and climate change. We are participating in GreenChill's corporate emissions reduction program as our Emerald Refrigerants line uses recovered and reclaimed product to fulfill our customers' cooling system demands, providing a sustainable solution and promoting the circular economy of refrigerants. In addition to our Emerald products, Hudson is uniquely qualified to leverage our field service capabilities 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. With comfort, cooling, and refrigeration systems considered essential in most areas of the world and systems having a lifespan of approximately 20 years, the availability of reclaimed HFCs to bridge the reduction in Virgin supply will be critical in ensuring an orderly transition to lower GWP refrigerants and equipment. We are pleased with the start to 2023 and encouraged by our prospects as we enter another selling season. That said, we, like many in our industry, continue to watch the current economic trends. Experience has taught us that comfort cooling and refrigeration can remain more insulated from the worst of a recessionary environment. But a recessionary environment can present challenges for everyone. With our industry-leading reclamation technology and decades of experience, we believe Hudson is ideally positioned to provide sustainable and responsible refrigerant management to support the industry transition to greener refrigerants and environmentally sound cooling equipment. We see a tremendous opportunity for our company to play a leadership role in meeting the refrigerant needs of the growing installed base of cooling and refrigeration systems, as well as providing conversions and service options as equipment requirements evolve. In fact, we've attended many conferences where attendees and officials have looked to Hudson for our expertise as thought leaders and sought our advice and assistance. This is an exciting time for our industry, and we are well positioned to facilitate and support the next move to the next generation technology and refrigerants. Now I'll turn the call over to Nat to review the financials. Go ahead, Nat.

Thank you, Brian. For the first quarter ended March 31st, 2023, Hudson recorded revenues of $77.2 million, a decrease of 8% compared to revenues of $84.3 million in the comparable 2022 period. The decrease is primarily related to decreased selling prices for certain refrigerants during the period, as well as lower sales volume in the quarter compared to the first quarter of 2022. Gross margin was 39% for the first quarter of 2023, compared to 54% in the first quarter of 2022. As expected and previously communicated, gross margin has begun to moderate as the gap between inventory cost and sales price narrows. With our current visibility, we remain comfortable with our long-range gross margin target of 35%. SG&A for the first quarter of 2023 was $7 million, which is slightly higher than the $6.8 million recorded in the first quarter of 2022. We recorded operating income of $22.7 million in the first quarter of 2023 compared to operating income of $38.3 million in the first quarter of 2022. The company recorded net income of $15.5 million or $0.34 per basic and $0.33 per diluted share in the first quarter of 2023 compared to net income of $29.6 million or $0.66 per basic and $0.63 per diluted share in the same period of 2022. 2023 and future periods will reflect a statutory tax rate of approximately 26%, excluding certain temporary and permanent tax adjustments. While the 2022 period reflects a very low effective tax rate due to the use of then-existing net operating loss carryforwards. During the three months ended March 31st, 2023, the company generated $11.6 million of cash flow from operations compared to $5.1 million during the three months ended March 31st, 2022. During the first quarter of 2023, the company paid down an incremental $3.3 million of term loan debt, resulting from improved performance and increased cash flow, reducing its leverage ratio to 0.35 to 1 for the trailing 12 months ended March 31st, 2023. This represents a significant decline from a leverage ratio of 1.16 to 1 for the trailing 12 months ended March 31st, 2022. The company reduced total outstanding debt by 56% from $100 million at March 31st, 2022 to $43.6 million at March 31st, 2023. As you know, interest rates have risen almost 500 basis points over the last year, so this debt reduction has provided significant savings for the company. Throughout this time, we have not needed to borrow against our revolver loan, which allows us even greater financial and operational flexibility. Stockholders equity improved to $191 million at March 31st, 2023 as compared to $175 million at December 31st, 2022. The company's availability, consisting of cash and revolver availability at March 31st, 2023, was $84 million. As we continue to generate additional cash flow in 2023, we expect to further deleverage our balance sheet, ensure we have adequate inventory on hand, and consider acquisition opportunities as they arise. We have strong liquidity with a solid financial platform and financial flexibility as we look forward to the future. I will now turn the call back over to Brian.

Thank you, Nat. Our 2023 selling season is off to a solid start, and we are focused on preparing for what we believe will continue to be a very receptive market for our products and services for 2023 and beyond. We look forward to continuing to drive the momentum we've built and to growing our relationship, 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.

Thank you. At this time, we will be conducting a question-and-answer session. The first question is from Ryan Sigdahl with Craig-Hallum Capital Group. Ryan, please proceed.

Good afternoon, Brian and Nat. Thanks for taking our questions.

Good afternoon.

Good afternoon.

I don't think I caught it. But let's just start with current prices and what you're seeing in real time for R22 and R-410A in the market?

R22 continues to remain strong in the $30 plus range and probably will continue as we really have normal economics with respect to supply and demand. HFC pricing came down at the tail end of last year's selling season and it continues to be soft as we begin this year's season. Pricing for HFCs is in the $10 plus range, which is down from where we were last year. This particular year so far, we haven't had a lot of warmer weather even in the southern states. So we think it's been a slow start, mainly because of a lack of AC demand. But as we always say, it's a nine-month season and we expect that demand to begin as soon as we get warmer weather.

I can attest to that here in Minnesota; it has yet to warm up. So I think it's clear that's been felt across most of the US. Curious on gross margins, pretty meaningful outperformance this quarter. So nice job there. Good to see despite not having the price tailwinds you've had the last two years. So I guess my question is, how do you feel about that medium-term gross margin target? It feels like structural gross margins of this business are higher. That's kind of the first part. And then second, was there anything unique in the quarter, any sell-through of kind of older, lower priced inventory or anything unique to call out?

Yeah. So versus last year, as you know, as we mentioned, Brian mentioned on the call as well, the cost basis of inventory has caught up with the selling price as well. So we still maintain our longer-term target of 35% from a gross margin perspective overall.

And as we said, those long-term targets we feel are conservative. We don't yet know how well and how quickly reclamation will grow. We do expect that to occur, and when that begins to happen, it obviously gives us an opportunity to do better at the gross margin level.

To address the other part of your question, there were no anomalies or irregularities to report.

The 39% is a decent run rate assuming steady state price going forward kind of through this season, assuming similar reclamation, etcetera.

Yeah, the only thing that could, let's say, hurt it possibly, although we don't think so, is if the volume is softer this year compared to last year, for example. We do expect the warm weather to come; it just hasn't quite hit yet.

Good. Last one for me. Any update on the Lennox Partnership? Has that yielded any progress specifically on reclamation activity?

Yeah, it's growing. It's going to, I think, continue to grow over time. We're really excited about it from a very much a long-term perspective. And so we continue that relationship, and I think it will really bear fruit and sort of compound, if you will. It starts slow, and then as you begin to get momentum, it begins to grow at a pretty quick rate.

Excellent. Nice job, guys. Good luck.

Thank you.

Thank you.

The next question is from Chip Moore with EF Hutton. Chip, please proceed.

Good evening, Brian and Nat. Thanks for taking the question. I wanted to ask, I guess, in relation to your comments there, Brian, about volumes and potential recession challenges. I think you called out even though the business is more insulated, maybe some historical perspective there in prior downturns would be helpful. And then I guess more specifically, any impact from the regional banking tightening that's going on in your customer base that would be concerning.

So when you think about prior experiences, certainly in difficult economic conditions, people tend to repair units rather than replace them. And generally, repairs are a little bit better for us than replacements. And typically as the systems get older, they tend to have more problems and therefore require more repairs and things like that. So usually, poor economic environments really don't have a material impact to us, although obviously it could, if we had a terrible condition with lots of unemployment. Typically, really, though, what impacts a nine-month selling season for us is weather. If you don't have warm weather, you're not going to turn your AC systems on; our entire industry, and seasonal demand is driven by that AC demand. So we're waiting for the warmer weather to come, which we expect. Then we ought to have a fairly normal selling season.

Got it. Yeah, we all like that warmer weather. Maybe if I could ask one more, sort of dovetails on that repair rather than replace, maybe expand on leveraging your field service capabilities, partnership potential, M&A potential, sort of how you attack that opportunity.

Well, certainly as it relates to our field service, we benefit by using the term emergency response. So to the extent supermarkets, office buildings, and chemical plants have some sort of system down, they're going to pay to get the system back up and running. Our field service will typically do well. We will benefit, though, from an additional layer of revenue and growth opportunity from all of the conversions that are expected to take place over the next five to 20 years. That will be additive to what we've seen to date, particularly over the last 10 or 15 years. Say it another way, the opportunity before us for conversions is going to look similar to how our business developed in the 90s with the significant growth we had in that services business.

Got it. And then in terms of resources to meet that development, I mean you have a little bit of time. But how do you think you fare there?

Yeah, again, I think the labor markets are still very tough. We are having difficulty filling a handful of positions; probably similar to what other folks are experiencing. There is somewhat of a shortage of labor, generally speaking, in the HVAC industry. So that's going to be probably the one thing we have to keep an eye on and try to hire and manage ahead. But generally, we're able to balance our overall expenses. Like our SG&A growth was fairly nominal this quarter. Generally, our SG&A growth is inflation rate type growth, so we're expecting that to continue.

Got it. Okay. Thanks for the color. I appreciate it.

Thank you.

The next question is from Gerry Sweeney with ROTH Capital. Please proceed.

Good afternoon, Brian and Nat. Thanks for taking my call.

Good afternoon.

Question about, we know Q1 is very seasonal, but as we move into through 2023 into 2024. This is a different sort of refrigerant market than we've been in before. Just because HFCs are the predominant refrigerant and they're stepping down, etcetera. Are you having any talks with customers where they recognize that this impending step down is coming along and they're planning for either taking more inventory or they want to partner with you? They want to become a preferred customer with Hudson, etcetera; sort of prepping themselves for what's going on. That may give you a little bit more visibility on revenue and opportunity.

We do think there's going to be some downstream build of inventory in advance of 2024, which is going to be a huge step down. We try not to support that, if you will, meaning we're not looking to sell next year's refrigerants this year, so we're careful how we work with folks in those kinds of environments. But we've been there before with all of the R22 step downs and the CFC step downs back in the 90s. The other part of it is, often people don't have the ability to necessarily build inventory because their warehousing space is tight, and they have to be able to clear out air conditioning and refrigerants to bring in heating equipment for the winter and things like that. So there's probably going to be some of that build because a fair number of folks know what's going to happen next year with the step down. We've managed through that before, and it's probably something you're going to see in the latter part of the year, like Q4.

Okay. And I apologize. I didn't mean like an inventory build. I was almost wondering if you could create some kind of preferred customer program with some of your clients where they buy into a certain amount of refrigerant for this year or for next year. And I don't want to say you used the word guarantee, but I mean, I'm doing this a little bit off the cuff, but where you get a little bit more visibility price certainty, they get supply certainty, not necessarily building inventory, but some type of a relationship. So you smooth out some of the demand or peaks and valleys per se?

Historically, we've never really had that kind of relationship with customers and that it's always been a spot purchase as they need it. The strategic things that we have been talking about probably now for maybe as long as two years is making sure that we're working with folks who want to support recovery, which then leads to more reclamation. So if someone's just looking for refrigerant or getting a quote from five or six people and has no desire for supporting recovery, then generally we're not working with companies that would fit that definition. As I said a moment ago, we would rather work with companies that are thinking about the long-term, thinking about the need for recovery, refrigerants to service the installed base and so forth. So that's the relationship, but not so much fixed pricing or guaranteed supply.

Got it. Now that makes sense. I remember you discussed that before. Switching gears to the recovery and regulatory front, I believe there was some talk that the AIM Act needs to have certain requirements in place later this year to encourage increased reclamation. Any thoughts on how that's developing or any indication of where that may lead?

Yes, there's a lot of initiatives going on right now at the state level, but ignoring that for the moment and focusing on the federal level. Right now, there are two rules for which the EPA has received public comment. One is called the Equipment Transition Rule, which deals with GWP chart sizes for different applications in future periods. That rule should get finalized sometime, say, mid-year. In addition to that rule, there's a second rule that covers the allowance system for the 2024-2028 period of time. That also should get finalized sometime in the middle of this year. The next big rule or proposed rule, I should say, I apologize, is on refrigerant management, which includes reclamation. We believe based on what the EPA has publicly said is they expect to release that proposed rule approximately in September of this year and seek to finalize that probably very early in 2024. That's going to be, for us, the most important rulemaking relative to the overall AIM Act requirements.

Do you have any inclination as to directionally where that rule is going to land?

Well, the EPA is involved in a lot of public discussions about ideas that they have and thoughts that they want to see, what industry members think about. The EPA is receptive to conversations and comments. We've already participated in what we might call a white paper that was initiated by two environmental organizations, NRDC and EIA, and consulted with them on that, which discussed a number of potential programs that the EPA could consider in connection with this next rulemaking. So we think there's a lot of information available for the EPA. The question is we're not sure what they may choose or the path they'll focus on.

Got it. Okay. I appreciate it. I'll jump back in line. Thanks.

Thank you, Gerry.

We have reached the end of the question-and-answer session. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.

Sorry, sorry. We would also like to thank our employees for their continued support and dedication to our business. And I want to again thank our long-time shareholders and those that recently joined us for their support. We look forward to speaking with you after the second quarter results, and have a good night, everybody.

Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.