Greetings. Welcome to the Hudson Technologies Third 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 third quarter of 2024. On the call today are Brian Coleman, President and Chief Executive Officer, and Brian Bertaux, Hudson's CFO. 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 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 of the factors that could cause our actual results to differ materially. With that out of the way, I will turn the call over to Brian Coleman. Go ahead, Brian.

Well, good evening, and thank you for joining us. As we mentioned on our second-quarter earnings call, the third quarter of 2024 included several industry developments, including the EPA's issuance of the final Refrigerant Management rule and the release of the 2023 reclamation and inventory data collected from industry participants as of December 31, 2023. Additionally, the third quarter marks the close of our nine-month selling season, and we have some pricing data to share. We'll get into the industry data points and our outlook moving forward a little later in the call, but first I will provide some color around our quarterly results. As you know, the 2024 cooling season was challenging, and the third-quarter revenues decreased primarily related to decreased prices for certain refrigerants, as well as slightly lower revenue from our DLA contract as compared to the third quarter of last year. To provide some perspective around the pricing dynamic, at the close of the third quarter of 2024, HFC prices had declined an additional 20% from the pricing levels we reported on our second-quarter 2024 call to approximately $6 per pound. There are several types of HFCs, so the pricing for any one might be different than others. When we talk about the price of HFCs, we're generally focused on the price of HFC-410A, which represents about 70% of the total aftermarket demand for HFCs. By way of context, HFC-410A was the most price competitive HFC during the sales season, while other HFC pricing was not as volatile. While this season's pricing dynamic is disappointing in the near term, pricing trends are only one element of our business model, and we remain confident that the ongoing phase-out of HFCs will ultimately move prices higher as demand for HFC refrigerants begins to outstrip supply. We have said many times that we don't believe it's a question of if HFC pricing increases, it's more a question of when HFC pricing will increase. Additionally, with our longstanding industry relationships and reclamation capabilities, we are well-positioned to fill the expected increase in demand for reclaimed refrigerants as virgin production is curtailed by the ongoing HFC phaseout. We are committed to executing our long-term growth strategy to capitalize on HFC phasedown and the expected corresponding growth in demand for reclaimed refrigerants. While pricing pressure in the quarter impacted our gross margin performance, we achieved solid profitability. However, with our visibility today, we are adjusting our expectations for full-year revenue, which we expect to be at the low end of our prior guidance range, and a full-year gross margin of approximately 28%. It should be noted that the fourth-quarter gross margin is expected to be traditionally lower than Q3, which is consistent with last year due to lower volumes related to seasonality. As many of you know, the cooling and refrigerant industry has been continuously transitioning to drive the development and use of lower GWP refrigerants and equipment. During the third quarter, the EPA issued its final refrigerant management rule, which is the third important pillar from the AIM Act, with a primary focus on reducing leak rates and promoting growth in reclamation. Among other directives, the final rule mandates the use of reclaimed refrigerants for servicing certain sectors of the market beginning in 2029, which we view as a positive step in driving the industry's broader use of reclaimed refrigerants. Our industry does not have reclamation without a technician choosing to recover the refrigerant during a service call or at the end of life of the equipment. Hudson currently pays for recovered refrigerant, and we have placed an emphasis on promoting best practices for recovery during technician training. We believe the implementation of a mandate for the use of reclaimed refrigerants establishes a message to technicians that the practice of venting refrigerants is not sustainable. The current installed base of HFC equipment has a potential operational life of approximately 20 years. So, if technicians want to serve their customers for the long run, then they must recover and not vent the refrigerants. This rule represents the first time in our history that creates a federal requirement for the mandatory use of reclaimed refrigerants in certain sectors. We are also seeing favorable legislative activity on a state-by-state basis led by California, which is currently implementing laws to limit the sale and use of high GWP refrigerants, and will also implement a mandate for the use of reclaimed refrigerants in state government buildings in 2025. New York and Washington State also have legislation pending, and more states are expected to follow. Additionally, the EPA recently provided industry reclamation data for 2023, which showed an increase of approximately 7% in the terms of all refrigerants reclaimed as compared to 2022. This includes CFCs, HCFCs, and HFCs. If we isolate HFCs, reclaimed pounds grew by approximately 20% in 2023 as compared to 2022. So, we're pleased to see the growth in reclamation, and we're committed to working with our industry partners to redouble our efforts to establish greater recovery practices that will drive meaningful increases in reclamation activity in future years. The EPA also chose to provide recovered pounds data by reclaimer, which has never been previously provided. It should be noted that in this reporting, we are listed as the second largest in recovered pounds. We are looking to get some more clarity around this data, but for years, recovered pounds have exceeded reclamation by over 2 million pounds per year or by approximately 13 million pounds over the past five years. We believe individual organizations may have different approaches to the use of recovered pounds they report. Some will report recovered pounds that they will go on to reclaim, such as Hudson. Others may report recovered pounds and they'll stockpile those pounds. Still, others may report recovered pounds that they will destroy. Further complicating the data is that one reclaimer could purchase recovered pounds from another reclaimer that did not reclaim the pounds but previously reported those pounds as recovered. In that scenario, two different reclaimers may be reporting the same pounds twice. For the most part, Hudson only recovers pounds that we reclaim. All that said, according to the EPA report, our total market share for HFC reclaim pounds for 2023 is in the 20%-plus range with R-410A at approximately 25%. For the moment, it's unclear whether a certain amount of the recovered HFC stockpile from prior periods is finally being reclaimed, thereby inflating the 2023 total reclaimed pounds from prior year activity. If that was the case, then Hudson's activities would not include any one-time windfall for the processing of stockpile recovery refrigerant. While in the past, tracking recovered pounds was never a concern of Hudson, we will be spending more time analyzing this recovered data in the context of what we're seeing in the marketplace to get a clearer picture of the current recovered to reclamation data. Finally, during the third quarter, the EPA also gave a snapshot of where refrigerant inventory levels were as of December 31, 2023. Year-end inventory levels give us a sense of how the ongoing limitations of the virgin consumption are impacting supply. As we move through any phasedown, we would anticipate that production limitations will begin to limit year-end inventory as demand begins to surpass supply. At December 31, 2022, total reported HFC inventory was 388 million metric tons of CO2e, at the end of the year when HFC consumption had been curtailed to 90% of the cap. At December 31, 2023, the second year of consumption at 90% of the cap, HFC inventory levels closed the year at 378 million metric tons of CO2e. While inventory levels are moving in the right direction, we are a bit disappointed by the rate of decline in inventory levels, which would eventually lead to a supply-demand imbalance as consumption allowances met demand in 2022 and 2023. In 2024, consumption allowances were reduced to provide for 60% of the original cap. We're optimistic that we'll see a lowering in inventory balances as the end of this year, but we are concerned that the combination of inventory levels with the annual consumption allowances will not decline in the 2025 to '28 period, sufficiently relative to demand in those periods unless a petition is filed with the EPA to lower consumption allowances in those years. The primary reason for this observation is that next year, we're entering a period of OEM demand shift to lower GWP systems, and they therefore need fewer metric tons of CO2e of refrigerants to meet that demand. In early September, Hudson partnered with the Rocky Mountain Institute, or RMI, to publish a report that found that greenhouse gas emissions can be reduced by up to 70% on a per pound basis through the use of reclaimed refrigerant versus producing and using newly manufactured virgin R-410A refrigerant. As the availability of HFCs decreases to meet EPA phaseout goals, reclamation will be essential to meeting demand for existing systems, limiting market disruptions, ensuring a smooth transition for consumers, and providing a significant reduction to GWP. We are pleased to have had the opportunity to support RMI in publishing their report, which illustrates the significant role refrigeration reclamation plays in protecting our environment. We also believe that this report will stimulate users of refrigerants to choose reclaimed refrigerant over virgin on a voluntary basis in addition to any regulatory mandates to achieve emissions goals. Hudson is a leading provider of all refrigerants and we remain focused on achieving the high operational execution that ensures we are meeting our customer needs through refrigerant sales as well as through our servicing and reclamation capabilities. Through every evolution in our industry, and we've been through several, our primary goal has been to facilitate a smooth transition for our customers, while also being a proponent for sustainable refrigerant management as our industry moves to more efficient equipment and lower GWP refrigerants. Now, I'll turn the call over to Brian Bertaux to review our third-quarter financial results. Go ahead, Brian.

Thank you, Brian, and good evening, everybody. Now, I'll turn to the review of our third-quarter 2024 financial results with comparisons to the 2023 third-quarter results. Hudson recorded $61.9 million in revenue in the 2024 quarter, a 19% decrease from last year's quarter. The decrease was related to lower refrigerant market prices and lower revenue from the company's DLA contract. As a reminder, our 2023 DLA revenue was higher than normal due to certain non-recurring purchases, making for a tough year-over-year comparison. Gross margin was 26% for the 2024 quarter compared to 40% in last year's quarter, reflecting the lower refrigerant market prices. SG&A was $8.1 million this quarter compared to $6.8 million in last year's quarter. The increase in SG&A includes higher personnel costs and professional fees. We recorded operating income of $7 million in the 2024 quarter, compared to $23.1 million in last year's quarter. We recognized $2.3 million in non-recurring other income in the 2024 quarter, which was primarily related to a litigation settlement. The company recorded net income of $7.8 million or $0.17 per diluted share in the 2024 quarter compared to $13.6 million or $0.29 per diluted share in last year's quarter. We strengthened our unlevered balance sheet, ending the quarter with $56.5 million in cash and no debt. As previously reported, our capital allocation strategy is focused on organic and strategic growth, as well as share repurchases. During the third quarter, we repurchased $2.6 million in common stock. In support of our capital allocation strategy, the company's Board of Directors recently approved and increased our share repurchase program, thereby doubling the amount of repurchases that we can make. Hudson may now purchase up to $20 million of shares of its common stock, consisting of up to $10 million during each of calendar year 2024 and 2025. Finally, I would like to reiterate our expectations for full-year revenue to be at the low end of our prior guidance range with a full-year gross margin of approximately 28%, noting that fourth-quarter gross margin is typically a low mark for the year due to lower volumes related to seasonality. I'll now turn the call back over to Brian.

Thank you, Brian. I'd like to reemphasize that despite the challenging 2024 selling season, our view of the company's long-term growth opportunity has not changed. As the ongoing HFC phasedown continues, we are confident that HFC pricing will ultimately move higher. We also believe that higher pricing of HFCs, along with the mandated use of reclaimed refrigerant, will advance the industry's embrace of recovery and reclamation activity and create enhanced profitability in our business. Hudson has the longstanding customer base, national footprint, and proprietary reclamation technology to continue to grow our leadership role as our industry embraces new cooling technologies and refrigerants, and we look forward to capitalizing on the opportunities ahead of us.

Thank you. The first question comes from Ryan Sigdahl with Craig-Hallum. Please proceed.

Hey, Brian and Brian. Good afternoon.

Good afternoon.

You continue to reiterate, I guess, you expect pricing to move higher over time, but Brian, you alluded to the ending 2023 inventory, which we agree with, was fairly lackluster being down only 2% year-over-year and likely needing a petition to the EPA to accelerate that phasedown. So, I guess, if we don't get that petition and the EPA to accelerate it, are we looking at lower prices for longer and probably not seeing the imbalance until we get that big step down in 2029?

I mean, it's certainly a possibility. We don't know what 2024 will hold. 2024 demand should have been similar to 2023. So, we would expect some amount of reduction to that total inventory amount. But back to, as I said in my prepared remarks, we're concerned that the allowance structure for '25 through '28 could be allowing for additional allowances relative to demand for those periods due to the shifting of the OEM demand on lower GWP refrigerants, which means they're going to use lower amounts on a metric ton of CO2e relative to a pound-to-pound comparison. So, there's still pieces to the puzzle that we don't know and certainly will know better going into next year, but we do want to indicate our concern for that period, and we certainly would be supporting the concept of lowering the consumption allowances for the balance of through the '28 period.

Just a follow-up, Brian. What, I guess, entails that petition process? Can you give us a little more color on that? What would need to happen?

Well, think of it like a challenge to the EPA. Someone would have to put forth a rationale as to why, with specific evidence—and certainly possibly the inventory data would be that evidence—for a reduction of the annual consumption allowances, even in light of the fact that they've already potentially issued those, meaning they prepare a rule for '24 to '28, which said they would keep the consumption allowances constant over time. It still could be challenged and then therefore amended. When you look to Europe, Europe has gone through a process, and in some instances, have lowered the annual allowances relative to what the minimum level are. And back to this point, when you look at the chart that might be—you might find in our investor presentation and you see the stepdown over the periods, that's the minimum that the EPA could do. They can, in fact, go lower, but in this instance, since they've already issued the '24 to '28 rule, a petition would be the methodology to seek a lowering of the annual consumption.

Very good. Moving over to USA Refrigerants, the acquisition you just closed, what are you seeing there from an integration standpoint? And then, are you seeing what you hoped to see from an accelerant on the recovery of refrigerant to fuel into your reclamation process?

Well, the integration is going extremely well and really on two fronts where they're bringing in some new customers to sell refrigerants to, but also giving us additional sources to bring in reclaimed refrigerant. So, we're seeing that working well on both fronts and some very good strategic sources of reclaimed refrigerant.

And maybe to add, we now are past the point of integration and really now including the strategies applied historically by USA to strategies to Hudson's existing customer base. So, one of the things that we had hoped for with regards to the Airgas acquisition was with their extensive customer base to be able to grow our ability to receive more recovered gas. With the addition of the USA team, we're now being able to execute into the Hudson customer base, particularly that customer base that was acquired in the Airgas acquisition.

Thanks. And one quick one. What was the litigation settlement gain related to?

It was really related to a commercial dispute and settled at the end of the quarter.

I'll hand it over to the others. Good luck, guys.

Thank you.

Thank you.

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

Hi. Good evening. So just my first question here, it sounds like the depletion rate in the 2023 inventory has been slower than anticipated. So, would you expect any uptick in pricing during that 2025 Q3—Q2 to Q3 cooling season, maybe like $1 to $2 per pound?

It's very, very difficult to prognosticate pricing. And frankly, when you reflect on this particular year's cooling season, we saw a greater decline than we ever anticipated. And so, at some point, we're going to hit a floor. Are we at the floor or not? We don't know. But back to, let's say, increases in price, we think that it's important that we rely more on supply/demand economics as opposed to allowance holders acting in a particular way relative to price. So, the biggest price pressure HFC refrigerant is 410A. It appears from the inventory data, there's a significant amount of 125 and 32, and those are the two components that are necessary to build 410A. So, we are concerned that we're going to enter next year with similar pricing dynamics that we exited this year.

Okay. That's helpful. And when do you expect to see accretion on gross margins within your revenue mix to get back to your 35% long-term target? I guess just how should we think about the timing and cadence of that recovery?

Again, given the uncertainty in the pricing dynamics in this market, we would say that the 30% is probably a little bit further out until we see an increase in market prices. We do have some lower-cost inventory pools we can pull against moving forward, but it also has to be complemented by higher market prices to be able to get back to that target gross margin range.

Understood. Thanks for the color.

Okay. The next question comes from Matthew Moss with B. Riley. Please proceed.

Hi. Thanks for taking my questions. It's Matthew calling in for Josh Nichols. I just have a quick question. So, you mentioned revenue from the DLA contract being down year-over-year. So, I was wondering how much revenue came from the DLA contract this third quarter and what your expectations are for the year compared to those you laid out earlier this year.

Yes. So, we had mentioned a few times now that there were certain surge buying under the DLA contract that occurred in 2023 that we didn't necessarily think could occur in '24. Not that they can't, it's just that relative to managing the contract, it was unusual relative to the historical perspective. For the quarter, the DLA revenues were approximately $9 million. So, they're running at that rate that we tried to guide to as a mid-$30 million or low-$30 million annual revenue versus the $50 million-plus in annual revenue that we achieved in 2023.

Got it. Yes. Okay, cool. That was helpful. Thank you for taking my question.

We have reached the end of the question-and-answer session. I will now turn the call back to management for any 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 fourth quarter results. Have a good night, everybody.

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