Good day, everyone, and welcome to the Hudson Technologies Second Quarter 2025 Earnings Call. It is now my pleasure to turn the floor over to your host, Jennifer Belodeau of IMS Investor Relations. Ma'am, the floor is yours.

Thank you. Good evening, and welcome to our conference call to discuss Hudson Technologies financial results for the second quarter of 2025. On the call today are Brian Coleman, President and Chief Executive Officer; Brian Bertaux, CFO; and Kate Houghton, Hudson's Senior Vice President of Sales and Marketing. 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 express 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 of 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'd like to turn the call over to Brian Coleman. Please go ahead, Brian.

So good evening, and thank you for joining us. As sometimes happens, we had a slow start to this year's cooling season, which is why we always refer to a 9-month selling season rather than looking at it quarter-to-quarter. Our industry is driven by comfort cooling, so we are obviously weather-dependent, but we focus on things that we can control. That focus is centered on ensuring we best serve our customers' needs at all times, which can mean we are buying the recovered refrigerant or selling the refrigerant to meet theirs or their end customers' demand. During the quarter, we did see a lift in nearly all refrigerant pricing, some of which had to do with tariff increases. However, we did experience slightly lower sales volume compared to the second quarter of last year. In spite of the external conditions such as cooler spring weather and supply shortages relative to replacements of lower GDP refrigerants, we posted solid second-quarter results with revenues of $72.8 million and a gross margin of 31%. During the quarter, we saw continued strength in our reclamation business as we leveraged our enhanced refrigerant recovery capabilities. We remain focused on expanding our purchasing presence in the marketplace with both new and existing customers as we've historically done. We'll provide a more detailed update around the progress in our reclamation business as the full year wraps up. As we've often mentioned, recovered refrigerants returns typically trail refrigerant sales by one quarter each season. DLA orders during the second quarter were in line with our expectations and our anticipated annual order run rate for the DLA contract. We are now entering our 10th year serving the DLA and DoD needs, and we believe we will have information on the new contract award results later this year. As I mentioned a moment ago, refrigerant pricing improved in the second quarter, showing a sequential increase for the first time in the past two cooling seasons. When we discuss pricing, we're generally focused on the price of HFC 410A, which represents about 70% of the total aftermarket demand for HFCs. During the course of the second quarter, HFC pricing reached $8 per pound and favorably impacted our gross margin performance. Currently, we're seeing stabilizing prices with some slight declines from the second quarter, which may be associated with the volatility of tariffs. Therefore, with our visibility today and recognizing that quarter four is our seasonally slowest quarter, we are maintaining our full year 2025 gross margin target of mid-20% or potentially slightly higher depending on the strength of the third quarter. Looking at the broader regulatory landscape, the elements of the AIM Act, including the mandated phasedown of HFCs, remain in place. That said, it's our understanding that the new leadership at the EPA is continuing their evaluation of certain regulations, including the AIM Act. We are closely monitoring all the developments and are in direct and frequent communication with the EPA as well as members of Congress. Our unlevered balance sheet at June 30, 2025, reflects $84.3 million in cash and no debt. Our capital allocation strategy remains committed to the three pillars: investing in organic growth, pursuing acquisition opportunities that will strengthen our capabilities, and the opportunistic repurchase of our stock. In keeping with this strategy, we repurchased $2.7 million of stock during the second quarter. Now I'll introduce Kate Houghton, Senior Vice President of Sales and Marketing, to provide some additional detail around Hudson's market opportunity. Please go ahead, Kate.

Thank you, Brian, and good evening, everyone. As Brian mentioned, our second quarter sales volume was impacted by prolonged cooler weather in the Northeast and Midwest, where temperatures didn't meaningfully warm up until mid-June. As you know, our sales cycle is typically driven by the first few hot days of any summer when cooling systems are activated and operating issues present themselves, resulting in a service appointment. We are encouraged by the increased sales activity we saw late in the second quarter, which is continuing into the third quarter. Throughout every selling season, we focus on the parts of our business that we can control, which include making sure our customers have the refrigerants they need where and when they need them and promoting recovery and reclamation activities as our industry transitions to lower GWP equipment and refrigerants. Our long-standing customer relationships have thrived based on our ability to provide our customers with a full range of the refrigerants to efficiently run their business, combined with their reciprocity in returning to us the recovered refrigerants that fuel our reclamation business. We remain confident that the current phase down of HFC refrigerants represents a significant long-term growth opportunity for Hudson as reclaimed HFCs will be increasingly necessary to allow the installed base of units to achieve their full economic life as the supply of virgin HFCs becomes more limited. As a reminder, HFC equipment currently represents the largest portion of the installed base and typically has a lifespan of approximately 20 years. So the demand tail for HFC refrigerants is expected to be long. With our national footprint and robust customer network, we have the ability to drive sales growth for new refrigerants while also serving as a proponent and resource for recovery and reclamation activities as we bridge the supply gaps created by the phase down cycles designed to move the industry to lower GWP refrigerants. Hudson is well positioned to benefit not only from the federally mandated phasedown of HFCs imposed by the AIM Act, but also from state-by-state initiatives. For example, several states have already instituted requirements for the use of reclaim refrigerant in their municipal buildings, and we expect more to follow. Recently, the U.S. Green Building Council recognized the role of reclaimed refrigerants in the LEED Version 5 program. LEED, which stands for leadership in energy and environmental design, was established 25 years ago and is recognized globally as a green building rating system. We are encouraged that reclaim refrigerants are now on the radar of LEED professionals. Importantly, as contractors better understand they will need reclaim refrigerants to serve their customers as mandates create shortages in virgin supply, they are less likely to vent refrigerant in the process of servicing a unit. Our team here has devoted a great deal of time and effort to training technicians around best field practice recoveries and the benefits of responsible life cycle refrigerant management. We are a frequent presence at HVACR conferences and training events, and we are often invited to address technician training sessions hosted by our customers. During the second quarter, Hudson attended and spoke at Lennox Live and ServiceNation events and supported World Refrigeration Day. As our industry continues its ongoing pursuit of lower GWP refrigerants and equipment, Hudson remains a key supplier of next-generation refrigerants. At the same time, we play a leadership role promoting recovery and reclamation that will bridge the transition so that our customers are prepared to continue to service the full life cycle of legacy units. Now I'll turn the call over to Brian Bertaux, our CFO, to review our second quarter financial results. Go ahead, Brian.

Thank you, Kate, and good evening, everybody. I will now review Hudson's second quarter 2025 financial results with a comparison to the second quarter of 2024. Hudson recorded $72.8 million in revenue, a decrease of 3%. As Brian and Kate noted, refrigerant sales volume was slightly lower than last year due to a late start to the summer weather in the Northeast and Midwest. This was partially offset by an increase in the average selling price of refrigerants. Gross margin was 31% compared to 30% in the 2024 quarter, with the improvement driven by favorable trends in market pricing. Gross profit at $22.8 million was slightly higher than the 2024 quarter. While the gross margin in the second quarter improved due to favorable market pricing trends, we are maintaining our full year 2025 gross margin target of mid-20% with some upside potential as we've seen slight moderation in pricing levels thus far in Q3. We posted $9.3 million in SG&A expenses, which was slightly higher than last year due to increased staffing. The improvement in gross profit, which was offset by increased SG&A costs, put operating income at $12.7 million, just shy of the $12.8 million posted last year. We recorded net interest income of $700,000 compared to net interest expense of $200,000 last year, reflecting the improved liquidity from the company's unlevered balance sheet. Hudson recorded net income of $10.2 million or $0.23 per diluted share compared to net income of $9.6 million or $0.20 per diluted share in the 2024 quarter. The company strengthened its unlevered balance sheet, ending the quarter with $84.3 million in cash and no debt. Our capital allocation strategy remains focused on organic and strategic growth as well as opportunistic share repurchases. In keeping with this strategy, we repurchased $2.7 million of stock early in the second quarter. We have purchased $4.5 million in shares thus far in 2025. I will now turn the call back to Brian.

Thank you, Brian. In the short term, we remain focused on driving strong execution as we move through the balance of the selling season to ensure we are meeting the refrigerant and servicing needs of our customers. Long-term, we believe our recovery and reclamation capabilities position us well to become a supply source of reclaimed refrigerants as ongoing phase downs limit the supply of newly manufactured refrigerant. Our industry will continue to pursue the development and use of lower GWP refrigerants, and Hudson has the expertise, facilities, and distribution network to bridge the transition for all types of refrigerants. Operator, we'll now open the call to questions.

Your first question is coming from Ryan Sigdahl from Craig-Hallum.

Nice quarter. I want to start with just industry. We've been hearing others talk about repair mix being up in the quarter given supply challenges on the R-54 and A2L side, both system and gas. Did you guys see any benefit from that via your HFC and kind of aftermarket business? And then did you participate directly in any of that aftermarket sell into the A2L from a new system install standpoint given systems were, in some instances, supplied by the aftermarket versus precharged and sold?

Sure. We did see repair versus replace being an element of Q2 activity, leading to relatively strong demand in our core business. We do already participate in the aftermarket sales of A2L refrigerants, both 454B and 32. So we're really covering both the existing HFCs and also already working in the A2L space in the aftermarket.

Kate, are you able to quantify kind of how big the A2L market is for Hudson?

At this point, it's relatively small. There is an aftermarket demand because many systems in the installation need a small amount of refrigerant due to the change in charge on OEM units, but it's still small relative to the overall business at this point.

And maybe one thing to add, Ryan, to that question. You're still seeing the sellout of, let's say, 410A equipment or other equipment that was manufactured in '24. That sellout is happening pretty rapidly. So possibly, although we're not giving guidance on next year, but you could possibly expect to see almost a doubling in volume with A2Ls next year because at that point, there should be no 410A or other high units present in the system to then be installed. So we're on a growth trajectory of what the future will be for both 454B and 32.

Maybe just a follow-up question on that, Brian. I guess we were hearing shortages, so there was more kind of aftermarket charges versus precharged systems. I guess, assuming supply chain is more normalized by next year, you still think you can double the A2L and HFO volumes, even considering they will still come precharged from the factory?

So what you're referring to is that the units come precharged from the factory. However, the charges are supporting less of a line set for installation than some of the traditional HFC units have. So it's unclear if the OEMs will make significant changes to that going into next year. So at this point, we do think that doubling of that volume in the aftermarket for installation is very reasonable.

Very good. Moving over to HFCs. What's the current price? I know you said $8 it kind of peaked out at in the quarter, but what's the current price there?

It's peaked out around $8. Sometimes it's a little above. And again, when we say 8, we're really talking about 4 today. We've seen a slight retraction in that price, but we're pretty much steady in that range.

Good. And then can you quantify from a reclamation standpoint, whether it's volume in that you've bought or volume out, whatever you want to quantify, but kind of how much that's grown and where the reclamation business is at?

So we don't report reclamation activity until the end of the year, but we're encouraged by the activity that we have going into Q3.

Probably at this point, the influence of the USA acquisition is difficult to break out any longer because it's fully integrated. So certainly, the USA acquisition and the team that came over jump-started our growth rate, but we've added new initiatives to support what they were doing and broaden that across the country. So we're probably not going to be separating, let's say, USA reclaim activity versus Hudson activity any longer.

Very good. Last question for me, just regarding the HFC, sorry for jumping around, but how do you feel about the current in-channel inventory stockpile?

It's a good question to ask, but it's still a little early for us to answer directly. First off, hopefully, everyone knows the EPA should be releasing the 2024 inventory data. We think it might be September, October, and that we'll be able to talk about that relative to our third quarter results. We do think that there is some stabilizing between the annual allowances and the overall demand, where in the past, we were a little concerned that the allowances may be ahead of demand. But again, it's really hard to tell because back to some of your earlier questions and your good channel checks, there was a lot of difficulty forecasting what the 454B and 32 demand, particularly for the aftermarket would be for this year. And because a lot of the producers that were involved in those products were adding a significant amount of capacity and finally getting to the point where I think they're catching up and equaling supply and demand, it's hard to say how that's impacting all the other HFCs. But we'll report all that in the third quarter.

Your next question is coming from Gerry Sweeney from ROTH Capital.

A couple of quick questions here. Channel checks indicate even though Q2 started slow, our understanding is volume and demand have been very strong across most refrigerants up until the end of the week last week. Just curious if you could give a little bit of detail on volumes. And I know August 15 is sometimes the flipping point for the heating and cooling season, but any thoughts on just the trend on volumes going forward?

Well, I think it's the equivalent of 105 degrees here in New York. So I'm not sure that August 15 is going to be the date this year, Jerry. It's a good thing. 105 and humid. So... Yes, we've seen strong - in that mid-June, we've seen strong volume and activity, and that's continuing up until now. And so again, with the heat around the country in a lot of areas, we're continuing to expect to have a very solid Q3.

Got it. Comment in the prepared remarks about the EPA and the AIM Act and discussions. And when the AIM Act came about, my understanding was probably bipartisan and hit a lot of key areas people were looking for, right, because it was a new molecule, it was patented. It blocks some growth or some refrigerants from China because it's a new molecule. It was an equipment upgrade cycle, right? So that's sort of, we'll say, the right side of the aisle like that, the left side, like the phaseout of GWP refrigerants. Just curious if there's anything we should be looking further into what's going on with some of those discussions or any changes, but it seemed like it checked a lot of the right boxes the last go-around. So any comments on that front?

Yes. Looking back, President Trump signed the AIM Act in December 2020. There are many complex signals to understand regarding statements from the White House or the EPA administrator. They are reviewing several regulations with the intention of reducing those that they believe may harm U.S. business competitiveness. While there are broader issues at play, it's important to note that the EPA administrator recently mentioned that carbon emissions are no longer considered hazardous to human health. This statement may not directly impact the AIM Act but could influence other areas related to emissions. However, Hudson and the rest of the industry are actively engaging with both the EPA and Congress to explain the importance of the AIM Act, which is a bipartisan measure. We strongly believe that reclamation is crucial for the long-term benefit of American consumers, as without it, the full economic lifespan of equipment may not be realized, potentially leading to significant capital expenses. For example, the cost for a residential unit could be around $12,000. We trust that the current administration and the EPA understand the value of reclamation, and we will continue to advocate for it.

Got it. Okay. Sticking with the Reclaim theme here. Obviously, I know you don't want to get into the volumes or anything like this. So this is more of a qualitative question on that front. But Ralph, doing a lot of seminars teaching, et cetera. Are you noticing maybe a different tone or tenor with some of the contractors? Do you think more and more people are understanding it or more people are attending? I'm just curious of maybe some of those grassroots type of upswell of maybe where reclaim is headed.

Yes, it's a great question. And we do a lot of speaking. We're out doing webinars and podcasts and conferences, and it's a significant part of the education process that we undertake here. I really believe that it's starting to take hold. Every time we talk to an audience, we still have contractors say, are you kidding me? Are you really going to pay? Are you sure there aren't fees? But we're starting to again reach more and more folks. And once we have a contractor that does a recovery and sends it in and does the return and gets the check, it's just something that they do over and over again. It becomes second nature and part of their business. So we think there's about 500,000 contractors in the country. We probably haven't talked to half of them yet, but we're well on our way.

Your next question is coming from Josh Nichols from B. Riley.

It's great to see the good margin even with a slightly slower start to the year. It appears that things ended positively, which is encouraging, and this momentum seems to be continuing. For context, I reviewed some notes and noted that in the latter half of last year, HFC prices dropped to around $6 a pound. Now, with prices at about $8 a pound, can we assume that if pricing remains stable for the rest of the year, you would expect revenue and gross margin to increase in the third and fourth quarters?

Yes. Well, as we noted in the script, you really can't rely on Q4. It's just out of season. So we do expect to have a strong Q3. We do see that prices are pulling back a little bit. So you could expect another strong margin performance in Q3, but Q4 will be soft due to seasonality. So when we look at that and with the slow start in Q1, it still looks like the mid-25 margin target for the year with the potential for some upside is still where we feel comfortable.

Fair enough on that. I think we talked about the inventory levels. And overall, I guess there's no update you mentioned on the DLA contract. It's an open contract. And anything you could tell us in terms about the competitive nature or how many people are going forward or people that historically had this contract or other similar contracts before? I know you previously mentioned that you felt that you were in a good position given your good delivery schedule over the past.

Yes. So let's say the one potential negative about this proposed proposal for the sort of the next years is that it was no longer constructed as a small business set aside, which certainly gave us an advantage when we won this over 10 years ago. We don't know how many people have been on it. We would imagine it's somewhere in the 5 to 10 range. We don't think it's more than 10, but we certainly don't think it's less than 5. We do have a very high level of success in terms of on-time performance and so forth and all the metrics relative to the existing 9-plus years now that we've served them. But what we don't know is who the other bidders are, what types of activities they may or may not have of serving the DLA and other contract needs. So we're just always being cautious. We think at this point, they're pretty far down the road. But we don't know, frankly, when they're going to make a decision. There's not like a shot clock and it's going to happen on a particular date in time. But we obviously will make an announcement once we find out who wins the contract.

Your next question is coming from Austin Moeller from Canaccord.

Just my first question here, you mentioned on the call that some of the price increase was impacted by tariffs. So could you just indicate, is that primarily affecting refrigerants that are being imported, which is benefiting prices for reclaim sourced in the United States? And then if there were any changes to tariffs, what would you expect the impact to be on pricing?

Yes, that's a great question. You're correct that tariffs impact both imported refrigerants and imported steel. We have a domestic supplier for cylinders, but we aren't always certain of the steel's origin, which can lead to price volatility. Recently, we've noticed high rates for products coming from China and increased prices for those from India, particularly related to refrigerants. However, there has been some stability in recent months, with higher tariff peaks from those countries decreasing. We're attributing some overall price increases and a bit of retraction to these tariff fluctuations. On the other hand, recovered refrigerants are sourced entirely in the U.S., so they aren't affected by tariffs. This generally allows us to benefit from price increases on the profitability of recovered gas. For instance, if the price is $6, our profit on a reclaimed pound might be close to $3, while at $8, it could rise to about $4. This means that for the same effort, we gain an additional dollar per unit of profit, which typically contributes to our operating margin since our selling, general, and administrative expenses don't fluctuate with refrigerant prices.

Okay. And then just on the DLA contract, when it's renegotiated, do you expect that the volume of industrial gases and refrigerants that they procure may go up, and so there may be a premium on that contract relative to the last time you negotiated it?

We wouldn't know that, to be honest. We would kind of expect that we had a great surge in demand on the contract two years ago, but it only lasted for about 12 months. The volumes for the contract have been a little higher in the last few years compared to the earlier years. I think part of this is due to the marketing we’ve engaged in with the DLA to encourage more participants to buy through the contract rather than around it. However, at this moment, we really don’t know a lot about what the new contract will look like, and we wouldn’t necessarily anticipate higher volumes once the award is made. We will provide updates on everything once we find out who is awarded the contract.

Thank you. That concludes our Q&A session. I'll now hand the conference back to Brian Coleman for closing remarks. Please go ahead.

Thank you, operator. I'd like to thank our employees for their continued support in what was really a tough quarter based on the conversation we've had this evening and the dedication to our business and both for our long-term shareholders and those that recently joined us for their support as well. We look forward to speaking with you after the third quarter results. Have a great night, everybody.

Thank you. Everyone, this concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.