Greetings. Welcome to the Hudson Technologies’ Second Quarter 2024 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, Jen Belodeau. You may begin.

Thank you. Good evening, and welcome to our conference call to discuss Hudson Technologies’ financial results for the second quarter of 2024. On the call today are Brian Coleman, President and Chief Executive Officer; and Brian Bertaux, Hudson’s new Chief Financial Officer. I’ll now take a 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 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 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 other factors that could cause our actual results to differ materially. With that out of the way, I’ll turn the call over to Brian Coleman. Go ahead, Brian.

Good evening, and thank you for joining us. So far, 2024 has a number of long-term positive events such as the significant cash flow generation, the anticipated share buyback, the acquisition of USA Refrigerants, and the expected final Refrigerant Management Rule, creating the first-ever federal mandates for the use of reclaimed refrigerant. Unfortunately, on a short-term basis, we’ve seen downward pricing pressure this sales season. As we move through the 2024 selling season, the landscape has been challenging. In the second quarter, demand for refrigerants was very strong with a 17% increase in volume over last year. However, we continue to experience pricing pressure for certain refrigerants, which negatively impacted our revenue and margin performance and outweighed the volume gains. During the second quarter, our industry saw an approximate 25% decline in the price of certain refrigerants as compared to the second quarter of 2023, and HFC pricing has decreased by about 6% from the level we discussed when we last spoke on May 1, with pricing levels at about $7.50 per pound today. Given the challenging pricing environment, our margin performance was below our long-term target. However, we delivered solid profitability. With our visibility today, if current pricing levels continue through the remainder of the 2024 selling season, we would anticipate full-year revenue in the range of approximately $240 million to $250 million with full-year gross margins of approximately 30%. As we outlined last quarter, we anticipated that pricing levels might not rebound as the season progressed, and we noted that last year’s strong DLA program specific order activity of approximately $20 million would likely not be repeated creating a difficult comparison for this year. While the current pricing situation is disappointing, we’ve been in the industry a very long time, and we believe this pricing dynamic is temporary and does not impact our long-term view of Hudson’s growth opportunity. As always, we remain focused on the elements of our business that we can control, including our commitment to ensuring that we are meeting the refrigerant needs of our customers and promoting recovery and reclamation as we help bridge the transition underway through current and future refrigerant phase downs. During the quarter, we announced our acquisition of USA Refrigerants, a leading purchaser of recovery refrigerants known for their strong sales organization and expertise in sourcing recovered refrigerant. Historically, USA generated average revenues of approximately $20 million per year. The skill set and relationship the USA team brings, combined with Hudson’s existing customer base are expected to significantly scale our capabilities around recovery and reclamation. This will allow us to significantly enhance our ability to profitably leverage current and future phase downs of virgin refrigerants and the resulting supply-demand imbalance. With the addition of the USA team, Hudson has created a dedicated refrigerant acquisition group focused on acquiring all types of refrigerants from CFCs to HFCs as well as the latest generation products, and we’re very excited about the potential contribution of this new group. In the month of June, we onboarded and integrated this business with ours and have set the strategic plan in motion, so that in July and the balance of the year, we should see the benefits of the growth opportunity we expected to achieve as a result of this acquisition, and we welcome the USA team to the Hudson team. And as a reminder, as we grow our volumes of reclaimed refrigerant and then when sold, we typically recognize double the gross margins than when we buy and sell newly manufactured refrigerants. Additionally, when we source more recovered refrigerants, we become more self-reliant on the supply side of our inventory needs. As we move towards the completion of our nine-month selling season, we will gain better visibility related to the current HFC phase down and where the industry stands in terms of the anticipated supply-demand imbalance. We also expect to see the EPA’s proposed Refrigerant Management Rule finalized this month, which is an important component of the implementation of certain aspects of the AIM Act. As a reminder, the proposed EPA rule mandates the use of reclaimed refrigerants for certain applications and equipment. If the proposed rule is adopted as final, this will be the first time in our industry’s history that we have a federal requirement for the mandatory use of reclaimed refrigerants in certain sectors. Additionally, many states have proposals under consideration that would mandate the use of reclaimed refrigerants and certain first mover states have already adopted legislation. California, for example, will implement a mandate for the use of reclaimed refrigerants in state governed facilities beginning in 2025. Furthermore, the EPA’s Technology Transition Rule, which was finalized in October 2023, promotes the introduction of lower GWP systems for new construction starting in 2025, as well as a conversion of the current estimated installed base of 125 million HFC and legacy systems over the next 20 years. Hudson can provide any and all types of refrigerant and service any and all types of systems. So we are well-equipped to support the move to next generation refrigerants and technology. We’re optimistic about the legislative environment as it relates to the industry compliance and our ability to assist existing and new customers. Additionally, we are an industry leader in our efforts to support the transition to more effective refrigerant management and environmentally friendly cooling equipment. We are, of course, a huge proponent for the importance of refrigerant recovery because beyond the negative environmental impact of venting, it is also a fact that without recovered gas, you will have no refrigerant source for producing reclaimed refrigerant. During the second quarter, we attended and presented at various industry conferences to discuss the importance of recovering refrigerant during service calls and the environmental benefits from using reclaimed refrigerant. We’ve been at the Data Center World, Service Nation Summits, Linux Vision Techs, 7x24 Exchange and International District Energy. Hudson is widely regarded as an industry thought leader, and we’re pleased to be actively working to assist the transition as our customers comply with the new regulatory environment. We previously noted the three pillars of our capital allocation strategy are business working capital needs, acquisitions, and share repurchases. Based on the 2024 Wells Fargo amendment, coupled with the recent approval of a share repurchase program of up to $10 million by the Company’s Board of Directors, we expect to initiate a share repurchase plan in the coming weeks. The timing of which will be based on the plan administrator and the legal guidance. We are committed to strategically deploying capital to drive long-term value for our stockholders. We believe that our compelling long-term profitability combined with the strength of our balance sheet and cash flows presents an attractive buying opportunity for our stock. The board’s authorization of a share repurchase reflects their confidence in Hudson’s long-term growth prospects and dedication to stockholder value creation. Given our significantly improved balance sheet over the past few years, we are now able to prioritize investing for growth organically and through acquisitions, while also potentially returning capital to our stockholders through the opportunistic repurchase of stock. As one of the largest individual shareholders, I take my responsibility as CEO most seriously. For those who have been longtime shareholders, hopefully, you will see two things: my and our employees’ dedication to ensuring the success and growth of our Company in a profitable and sustainable way and enhancing shareholder value. All of our actions are done with that intent, and I am especially proud of our employees’ commitment and dedication. With that said, I’d like to introduce Brian Bertaux, who as most of you know, recently joined Hudson as CFO. Brian has public company experience through his nearly 20 years with New York Stock Exchange traded Trex, a name you might recognize if you have high-quality composite decking at your homes. We are very pleased to welcome Brian and look forward to his contributions. Let me turn it over to him. Go ahead, Brian.

Thank you, Brian, and good evening everybody. I’m on day seven as CFO at Hudson Technologies and I’m impressed with what I’ve seen and learned thus far. I am thrilled to have the opportunity to join this accomplished leadership team and contribute to the Company’s long-term success. As Brian mentioned, I previously spent 20 years at Trex Company, the world’s leading manufacturer of wood alternative decking and railing. During my tenure at Trex, revenue grew ninefold from $100 million to $900 million and market cap reached $10 billion. I served in a number of senior management roles culminating as Interim President of Trex Commercial Products, a commercial railing product subsidiary purchased by Trex. While at Trex, I was instrumental in the Company’s capital allocation strategy and tactics which included M&A as well as opportunistic share buybacks. I’m excited to bring my broad financial and strategic leadership experience to Hudson and look forward to collaborating with the leadership team in driving operational excellence and strategic growth. This is a very exciting time to be joining this dynamic Company and industry. I look forward to the opportunity to introduce myself and get to know many of you over the coming days. Now, I’ll turn to our financial review. For the second quarter ended June 30, 2024, Hudson recorded revenues of $75.3 million, a 17% decrease compared to revenues of $90.5 million in the comparable 2023 period. The decrease was primarily related to decreased selling prices for certain refrigerants and lower revenue from the Company’s DLA contract. These decreases were partially offset by volume increases in refrigerant sales of 17% when compared to the same period of 2023. Gross margin was 30% for the second quarter of 2024 as compared to 41% in the second quarter of 2023 as a result of the previously mentioned depressed year-over-year market prices. SG&A for the second quarter of 2024 was $9 million compared to $8.3 million in the comparable 2023 period. During the second quarter of 2024, the company incurred $700,000 of non-recurring expenses related, one, to the USA Refrigerants acquisition as well as IT projects. We recorded operating income of $12.8 million in the second quarter of 2024 compared to operating income of $27.7 million in the comparable 2023 period. The Company’s effective tax rate for the second quarter of 2024 was 24.2% compared to 25.3% for the second quarter of 2023. The Company recorded net income of $9.6 million or $0.20 per diluted share in the second quarter of 2024 compared to net income of $19.2 million or $0.41 per diluted share in the same quarter of 2023. The Company strengthened its balance sheet ending the period with no debt and during the first six months of this year, the Company generated $38.8 million in free cash excluding the $20.7 million used to purchase USA Refrigerant, leaving $18.1 million of net free cash flow generation. Our $30.5 million cash position coupled with our revolving credit facility availability of $59 million sums to total liquidity of $89.5 million at June 30, 2024. This strong liquidity positions the Company very well to support the operating needs of the business and pursue an opportunistic capital allocation strategy. I will now turn the call back over to Brian.

Thank you, Brian. Before we go to Q&A, I’d like to reiterate that we believe the current pricing dynamic is temporary and does not impact our long-term view for the growth of our Company. We remain confident that the phase-out of HFCs will ultimately move pricing higher, accelerate reclamation activity, and drive enhanced profitability in our business. We believe Hudson’s leadership position in the industry, proprietary reclamation technology, and longstanding customer relationships leave us well-positioned to drive the necessary transition to reclaim refrigerant as virgin supply tightens and the industry adopts new equipment and technologies. Operator, we’ll now open the call to questions.

Thank you. At this time, we’ll be conducting a question-and-answer session. The first question comes from Ryan Sigdahl with Craig-Hallum. Please proceed.

Hey, good afternoon, Brian and Brian. Want to start with volume up 17% in the quarter. Can you break that down? I guess, what really drove that volume increase and was there any shift between quarters and kind of throughout the summer selling season?

So, Q1, the volume was somewhat flat, when we entered this selling season, but really we had strong interest in Q2. Now, the 17% as we talked many times before may not be the blended growth relative to the entire nine-month sales season, but we do expect based on the activities we’ve seen in Q2 and certainly see today that we do think we’re going to see growth over last year throughout the balance of the nine-month season in ‘24 compared to ‘23.

Good. Then U.S. Department of Commerce has been doing an investigation for the past year. They came out with findings and a termination in July. Basically, they’re going to enforce duties on HFC blends coming in from China that are further processed in the U.S. Curious your thoughts on that and the potential impact to the HFC market, whether it be pricing and or just general industry dynamics over the next couple of years?

So, we certainly do not like bad actors and bad behavior, and we feel certain companies that are selling refrigerant in the United States do have that propensity. With that said, we would have supported the petitioners in this ITC case ruling with regards to the circumvention findings that the ITC finally reached. Bottom line is, it appears that certain entities would have attempted to bring product in from other countries claiming that the source of the refrigerant were from those companies when it appears in fact the source was from China. As a consequence, there is a clawback, if you will, of duties that may impose some significant financial burdens on those that may have circumvented the rules. We don’t know what that impact will be. We certainly don’t know when those prior tariffs payments are due, but it could have a significant impact, particularly if someone brought gas in unfairly at a cost disadvantage to those that behave and follow the rules and regulations. So, it will be interesting to see what may happen over the next couple of months, but I think over the next couple of months we’ll have an answer.

Last quick one for me. Within the revised new guidance, how much of revenue is from USA Refrigerants acquisition?

I’m sorry, say that again, in terms of the balance of the year?

Correct.

Right now in the numbers that we disclosed, we would not have put much revenue in those ranges, partly due to the focus right now for Hudson and the USA team is buying. And we’re getting into that buying season relative to year-end. Now, we’re starting to see contractors accumulate gas. And I think we’ve said this before that typically the returns of recovered gas tend to go about three months beyond the sales season. So, what will happen is to the extent that most of their activity is dedicated to buying refrigerant that will go into inventory for sales next year. But certainly, we do have upside to the extent that we do garner more sales over the next, particularly three months, this remainder of the selling season relative to the guidance we provided.

Helpful. Maybe one clarification on that. As we think about next year, is this just an improved mix of inventory that you’ll be selling with, call it, double the gross margin since reclaimed gas or do you think this will be incremental volume layered on to kind of current Hudson business?

We think it’s going to be both. We sort of lost, if you will, the first two quarters of the nine months or three-quarter sales season based on the closing date and then the integration. So, we definitely feel confident that we’re going to get incremental revenue as well as the benefit from higher margins from selling recovered and reclaimed gas.

Great. Thanks guys. Good luck.

Thank you.

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

Hey, Brian and Brian, how are you guys doing?

Doing well, thank you.

Doing well, thanks.

Just one quick question on pricing and then I’m going to go in a different direction. But, curious if pricing has changed since some of the circumvention rules or determinations have occurred?

Again, the pricing dynamic that we described this evening is where we are today. I don’t believe we’ve seen any material pricing changes in any way directed towards the case. We do believe certain individuals that may have imported the gas and not paid those tariffs will be subject to a fairly significant clawback, and we’ll have that cash implication. So, how they run their business and how they generate the cash and all that stuff is yet to be seen.

Got you. Okay, that’s fair. Next question, acquisition team that you sort of highlighted with that you developed the USA Refrigerants acquisition. Can you give a little bit more detail on sort of how and the opportunity and how what they’re going to do, how they do it, how they are going to drive increased reclaim activity?

So, think of the USA team and the team has been around for 20-plus years, really good dedicated folks. Think of it that they had limited access to virgin supplies. So, for them to be able to meet their customer needs, they had to be nearly 100% self-reliant on the ability to find and purchase and then process recovered refrigerants. So, they’re very good at hunting, very good at relationships, relationships relative to payment and timely payment. They have a very strong reputation in the contracted community, and we’re expecting to bring that expertise to Hudson. And then most importantly, apply that expertise to Hudson’s customer base, where we feel that we haven’t done a sufficient job integrating the buying with the selling, and we think their team is really going to help us grow that opportunity as well.

Got it. And then, third and final question, obviously I am a fan of buyback especially with the stock at current levels, but at some point, you have a buyback, but you also have an opportunity to buy used gas potentially at a pretty cheap price. What’s the dynamic on that or what’s the thought process on that?

So, when we look at our free cash flow, we will certainly look first to support the business and the working capital needs, and then we seem to be generating more cash than needed for that. So, we are looking at acquisitions and also opportunistic share repurchases. It will be those three pillars. But first and foremost is for the business. But fortunately for us, our free cash flow generation is more than what’s needed for our business with our strategic growth.

I mean, at some point, would you want to acquire more used gas as opposed to build up working capital or inventory on the used gas side, especially at some point? I’m a fan, I’m a believer that the market is going to change, pricing is going to change and there’s an opportunity here.

Brian expressed it well in that, first and foremost, we want to make sure we have sufficient cash to meet our needs, and it’s mainly working capital needs for inventory. So, we are certainly not going to somehow limit our activities there or redirect cash if to the extent we make business decisions that we need more relative to inventory and inventory dollars, and particularly as it relates to dollars spent on buying used gas. With that said, I think we’ve talked about this a couple of times. We don’t believe that our dollars in ending inventory at December 31, 2024, will need to be higher than the dollars at December 31, 2023. And so far, we’re managing the business and that is the outcome thus far. Obviously, if things change, we’ll take a look at that. But we don’t think the current allocation of capital and the $10 million amount is going to impact anything to do with our ability to buy refrigerants.

That’s fair. I got you. Okay. I appreciate that. I’ll hop back in queue.

The next question comes from Josh Nichols with B. Riley. Please proceed.

Yes, thanks for taking my questions. A couple of the things I had already asked, but I’m just kind of curious where prices shake out whenever you look at the Company’s inventory levels today. Obviously, you have a couple types of refrigerants in there. But generally, for HFC, like what ballpark is the average price that you guys have for the inventory level? I’m just trying to think of the upside opportunity in the next selling season if prices start to kind of normalize and what that could mean for margins relative to that 30% level you talked about for this year based on $7.50 a pound?

So Josh, we’ll not provide that granularity as we talked many times; we’re the only public company in the refrigerant space. But when you go back to the earnings call for Q1, what we talked about is we believe that as we’re selling product in the 2024 season, we are pulling from higher FIFO layers on a cost basis than we anticipate next year. So, we do not believe the price of refrigerants is going to remain the same in ‘25 as they are in ‘24. But if they did just on a cost basis and FIFO inventory basis, we should have higher margins as a result of a lower cost basis entering the ‘25 year.

Fair enough. I appreciate the context there. And then I’m looking here, I’m kind of curious; I don’t think you mentioned it specifically on the call, but looking at the DLA contract, what was the DLA contract revenue in 2Q of this year relative to last year just for context for the year-over-year decline?

It wasn’t quite $5 million lower; it was actually about $4.2 million lower. So, we’ve made up a little bit of ground relative to that $20 million; but right now assume we are at a run rate as we talked about in that low $30 million range based on our anticipation. But as we said before, because there isn’t a backlog and long lead time, it’s still possible there could be some procurement of products similar to what they did last year.

Appreciate it. Last question for me, digging into the weeds a little bit. You did say there were some one-time expenses; was that like $700,000 related to USA Refrigerants and something else? So presumably, if that’s in SG&A, then SG&A is going to dip back down to close to around like the $8 million level in 3Q because I know it wasn’t backed out of any of the Company’s pro forma earnings because just report GAAP.

Yes, we would expect that. So SG&A excluding the USA Refrigerant acquisition plus some investments in IT to support the growth of the organization. Aside from those two, SG&A is very comparable to last year and we would expect that to continue.

Appreciate the context. Thank you.

Thank you, Josh.

The next question comes from Austin Moeller from Canaccord. Please proceed.

Hi. Good afternoon, Brian and Brian. Just my first question here. Has the DLA signaled anything about their forward purchasing activity in Q3 and Q4? I know you have some optimism that they could ramp that up in the second half.

It doesn’t quite work that way. We could get orders in and fulfill them in a matter of days. There isn’t much of a dialogue. There are so many different places within the DoD that could procure under this contract that you wouldn’t necessarily know who’s considering what buys when. That’s why it’s very difficult to predict. But to be clear, as it relates to the buying that occurred last year, they are active NSN numbers and therefore it doesn’t mean that they can’t buy, it’s just that based on the volume and activity we saw last year, we saw it ending in Q4 of last year and not reoccur. It doesn’t mean it can’t; we just don’t want to guarantee or state that it will. But if those orders come, we will be able to fulfill them and we’ll be able to fulfill them on a timely basis.

Great. And just a follow-up, what are you hearing in the market from your customers and other suppliers in terms of the burn down of the existing HFC stockpile that was created? Do you anticipate that it will be fully expended by the next cooling season?

We will get much more visibility about the answer to that question when the EPA reports the 2023 inventory data. We want to see what the relative relationship is of the movement of the inventory data between December 31, 2022 and 2023. We believe that this year’s cooling season has been quite strong as indicated certainly by our volume increases. And we would believe to the extent that there was a decline between ‘22 and ‘23 that there would be a greater decline between ‘23 and ‘24. So, we’re really wanting to wait for that data point, and that kind of goes back to the three things that are going to occur shortly that will make us comfortable to talk about the future. How do we end the season on pricing? What does the EPA’s final refrigerant management rule look like? And what does the 2023 inventory data look like? All three of those pieces of the puzzle should be available to us to be able to discuss in the Q3 earnings call.

Excellent. That’s very helpful in framing it. Thanks.

Thank you.

We have reached the end of the question-and-answer session and I will now turn the call over 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 both our longtime shareholders and those that have recently joined us for their support. We look forward to speaking with you after the third quarter results. 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.