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. 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. John, you may begin.

Thank you. Good evening and welcome to our conference call to discuss Hudson Technologies financial results for the fourth quarter 2023. On the call are Brian Coleman, President and Chief Executive Officer, and Nat Krishnamurti, Chief Financial Officer. Now take a quick moment to read the safe harbor statement. During the course of this conference call, we'll make certain forward-looking statements, all statements that address expectations, opinions, and predictions about the future of 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 and the factors that could cause actual results to differ materially. With that, I'll now turn the call over to Brian Coleman. Go ahead, Brian.

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 an 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 DLA-specific program activities that may not be repeated in 2024. Consequently, we may see DLA annual revenues return to more historical levels in 2024. Gross margin in the quarter was 31%, which is slightly lower than last year. Consistent profitability and operating cash flow have 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 2023. Starting in 2024 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 GWP systems for new construction starting in 2025, as well as a conversion over the next 20 years of the existing installed base of HFC 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 was 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 rule looks similar to the proposed rule, we will have the first-ever federal requirement for the mandatory use of reclaimed refrigerants relative to specific sectors of our industry. In addition, we are seeing certain states take action, either through existing legislation or with various proposals under consideration with reclaimed 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 a more stringent regulatory environment, some of our competitors may find it difficult to comply with the new requirements, 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 at two strategic points in the supply chain as a distributor of virgin refrigerants and as a producer of recycled or reclaimed refrigerants, which then can be distributed to 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 and 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 reclaimed volumes, particularly for high GWP HFCs like 404A and 410A. And it's encouraging to see a heightened focus on regulatory issues regarding HFCs. As a long-term proponent and practitioner of life cycle refrigerant management, we believe Hudson is uniquely 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 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 EMERALD Refrigerants and our on-site services were recognized by Building Green, an industry leader focusing on sustainable building solutions as a top 10 sustainable products and services for 2023. In July, Emerald was recognized again as the top product of the year by the Environment + Energy Leadership Awards Program, which recognizes excellence in products and projects that deliver significant energy and environmental benefits. We also joined the Cool 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 COP28, 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 and 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 comparison in Q1 of 2024 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 price that 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 that DLA-specific program activity purchases, which began in Q1 of 2023, 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 in 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 the next generation cooling solutions. Now I’ll turn the call over to Nat to review the financials. Go ahead, Nat.

Thank you, Brian. For the fourth quarter ended December 31, 2023, Hudson 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 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 the company invests 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. The 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 the full year ended December 31, 2023, Hudson reported revenue of $289 million, a decrease of 11% compared to revenues of $325.2 million for the 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 decreases 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 than 2022 since, as we previously stated, the tax benefit related to the deduction of net operating losses declined as we fully utilized these net operating losses in 2022 due to increased profitability. The 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 31, 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 31, 2023, as compared to $174.9 million at December 31, 2022. The company's availability, consisting of cash and revolver availability, at December 31, 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, two, review any possible M&A opportunities, and three, consider potential share buybacks. We have strong liquidity and our revolving loan credit facility provides us with a solid financial platform and flexibility as we look forward. I will now turn the call back over to Brian.

Thank you, Nat. 2023 was a strong year for our business and an example of what we can 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 will now open the call to questions.

And the first question today is coming from Ryan Sigdahl from Craig-Hallum. Ryan, your line is live.

Hey, good afternoon, Brian. I'm interested in your insights on R22 and R-410A or HFC.

Ryan, are you there?

Apologies, we seem to have lost Ryan's line. One moment. Hey, go ahead, Ryan, sorry.

Can you guys hear me?

Yes, go ahead.

Yeah, Ryan, maybe start at the beginning. We lost you at some point, sorry.

Well, good afternoon, guys. I just want to start on pricing. I know you said lower, but I'm curious if you could quantify kind of what you're seeing on the R22 side versus the HFC side and then how that's trended through the quarter and then now through March?

So Q4 quarter, HFC pricing and R22 pricing were fairly consistent as we updated back in November. And around that $10 price, it had a slight uptick from what was the low probably in Q3. As it relates to 22, we think 22 will remain constant and steady, if you will, pricing in, 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 $8 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, and a two-month view of the '24 selling season, we're seeing a little bit of break in some prices.

Great. DLA, are you willing to quantify what it was in Q4? I know you gave the year and then how that compared to a prior year?

As it relates to DLA, it was fairly consistent through the year, but we were getting signals that they weren't 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 non-recurring purchases. Now 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 of these types of purchases. It 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 may be more non-recurring than recurring.

Got it. One more financial. SG&A stepped up a little bit more than the normal in the quarter. I guess this is a new trend. And then what was that incremental spend on specifically in the quarter?

Yeah, incremental trend. I’d say incremental spend, I would say it's more on the personnel and the IT side as we invest more in each of those areas. And I would say that's probably closer to the run rate for the future.

Great. Thanks, guys. Good luck.

Thank you.

Thank you. The next question is coming from Josh Nichols from B. Riley. Josh, your line is live.

Yeah, thanks for taking my question. Just as a follow-up, I know you mentioned you didn't expect any DLA-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 how much 1Q maybe down quarter-over-quarter, year-over-year, relative to what you did last year just based on the DLA project specific stuff?

Yes, so the DLA increase and let's just say this extra $20 million possibly, although like I said, it could come up later in the year, was fairly even. So you're talking about something close to, let's say, probably not quite $5 million, but close to $5 million and that $20 million spread out pretty evenly over the quarters.

I appreciate the color on that. And then pretty big increase in inventory, right, for the quarter. I know that you're probably gearing up for an anticipated increase in reclamation refrigerants. I'm just curious if you could 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.

Yeah, you're really seeing, let's say, that seasonal buying and that you might historically see in the latter part of the year. So what will typically happen is we'll begin to stock up in Q4 for sales into Q1 and Q2 of 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 we would probably end up at the end of next year with about the same total dollars in inventory in December 2024 as you're seeing at December 2023.

Thanks, Brian. And then last question for me. You mentioned it. I mean you become a debt-free entity, you're generating a bunch of cash, right, 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 historics? I'm just curious for some context.

I will begin by addressing that. Our main priority regarding cash usage is inventory. Essentially, if prices rise later in the year, we need to manage that first and foremost. Additionally, regarding your point, mergers and acquisitions are certainly of interest to us. We just need to be patient and look for the right acquisition. As we've stated before, our goal is not to acquire a large number of companies indiscriminately. We aim to be strategic and insightful about the benefits each acquisition could bring. This may involve acquiring customer lists, relationships, and other synergies that can enhance our business and enable better cross-selling opportunities.

And maybe just to add one other thing to that, 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 to complete acquisitions and particularly interest in the HVAC 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're looking to keep management and staff. It's 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 it. I’ll hop back in the queue.

Thank you.

Thank you. The next question is coming from Leanne Hayden from Canaccord. Leanne, your line is live.

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

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. 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 once we get into Q2, we'll have more 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. All right. Thanks for that. And then just secondly for me, are you able to disclose which classes of refrigerants experience lower Q4 pricing relative to higher sales volume?

Yes, when discussing pricing today, we will differentiate HFC pricing as a whole, noting there are about 20 different HFC refrigerants compared to R22. When mentioning the current pricing pressure, we are referring to the HFC class, which is slightly lower than where we ended last year. Regarding R22, we indicated earlier that its price is stable at around $30 per pound.

All right, understood. Got it. Thanks so much, you guys.

Have a good evening.

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

Well, thank you, operator. I'd like to thank our employees for their continued support and dedication to our business. And 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 and have a wonderful day. Thank you for your participation.