Hudson Technologies Inc /Ny Q1 FY2026 Earnings Call

Greetings. Welcome to the Hudson Technologies First Quarter 2026 Earnings Call. The operator provided instructions. Please note, this conference is being recorded. I will now turn the conference over to your host, Jen Belodeau of IMS Investor Relations. You may begin.

Thank you, John. Good evening, and welcome to our conference call to discuss Hudson Technologies' financial results for the first quarter of 2026. On the call today are Ken Gaglione, Hudson's President and Chief Executive Officer; and Brian Bertaux, Hudson's Chief Financial Officer. I'll now take a moment to read the safe harbor statement. During the course of this conference call, we will make certain forward-looking statements. All statements that address expectations, opinions or predictions about the future are forward-looking statements. Although they reflect our current expectations and are based on our view of the industry and of our business as we see them today, they are not guarantees of future performance. Please understand that these statements involve a number of risks and assumptions. And since those elements can change 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'll turn the call over to Ken Gaglione. Please go ahead, Ken.

Good evening, and thank you for joining us to discuss Hudson's first quarter results. The first quarter is typically slow for our industry. But for Hudson, it was about executing on the operational and organizational progress we need to create the foundation for healthy, diversified growth in the years ahead. We made solid progress, heightened by strengthening our management team, making critical additions to our Board of Directors, launching our ERP system and signing a license agreement for the reclamation and resale of our next-generation refrigerants. Overall, we posted strong top-line results to start the year, driven by a commitment to excellence demonstrated by our employees at all levels of the company. The leadership team is deeply grateful and we thank all of our employees for their efforts during the first quarter, especially the introduction of the new ERP system. So we kicked off the 2026 selling season with revenue growth of 9% to $60.2 million, driven by strong sales volume and firming HFC prices, partially driven by unseasonably warm temperatures in the Southwest region, some uncertainty in global supply lines driving demand and overdelivery by our sales team. I'd like to point out that the first quarter revenue growth was stronger than we had expected and guided in our fourth quarter communications earlier this year. Our concern then was that the new ERP system launch and implementation challenges that we were facing, which are not an uncommon occurrence with a transition of this magnitude, would negatively impact results. With our visibility at the time, we expected first quarter revenue growth to be constrained to the low- to mid-single digits. But thanks to our people, the initial headwinds had less of an impact than we anticipated. And that, combined with strong execution and those warmer temperatures, contributed to revenue outperforming our expectations. The ERP system is now integrated and functional. And while we do expect to continue optimizing it for most of this year, we do not expect any major disruptions. The effort is already beginning to deliver the benefits of improved and faster management decision-making based on a single source of readily available data. We experienced gross margin pressure in the first quarter of 2026 related to year-over-year sales mix. While traditional HFC pricing was higher in the first quarter, slightly above $6 a pound, the first quarter of 2025 included a larger concentration of higher-priced and higher-margin HFO refrigerants. As you might remember, during that period last year we started the season with an industry-wide shortage of 454B, which is an HFO refrigerant and a popular replacement for R-410A in new equipment. The shortage resulted in Hudson seeing heightened demand for 454B as contractors needed to top off new systems as they came online and from inventory building to alleviate concerns over availability later in the season. Refrigerant producers effectively addressed this shortfall as the year progressed, and we view last year's increased aftermarket demand for HFOs as an outlier. We also restructured the management team in the first quarter of 2026 to better serve our long-term business objectives. This included the promotion of Rob Stoody to Senior Vice President of Operations. Rob is an industry veteran who not only leads our initiatives to integrate both our supply chain and plant operation, but also maintains his legacy role managing our relationship with the DLA. He is supported by a dedicated team of professionals focused on enabling our ERP system and preparing for new growth aligned with our strategic plan. We are well positioned today to meet demand for all types of refrigerants. And under Rob's guidance, we will further streamline and expand our capabilities and capacity to separate and reclaim more complex next-generation blends in the future. We also made changes to our sales and marketing organization in the first quarter. Kirk Reimer, who was formerly Hudson's Vice President of Sales, now assumes expanded responsibilities for core marketing and the execution of certain strategic growth initiatives as Vice President of Sales & Marketing. Kirk has played a key role building our national sales team and go-to-market strategies and now has a renewed emphasis on building our core marketing organization and supporting focused growth in the services component of our business. We added significant marketing talent to Kirk's organization in the first quarter, and we will continue developing our marketing and service personnel in the months ahead. The HVAC industry, as you might know, requires a wide variety of products and services to keep cooling systems operating, and we want to ensure that the market recognizes our unique capabilities in meeting customers' needs whenever, wherever and however they need us. Additionally, we enhanced our Board composition with the replacement of two outgoing directors with two new independent directors, Alan Sheriff and Jeff Feeler. Coming into this year, it was a priority of mine to build on the strong competencies of our Board by adding new directors with diverse professional experiences and distinct perspectives in areas where we will need them as the company continues to grow. Alan and Jeff bring the additional operations, M&A and capital markets expertise needed to advise and bring new perspective to the company's identification and assessment of new opportunities. Long-standing Board member Mr. Rich Parrillo was appointed Lead Independent Director, assuming responsibility from outgoing Director Mr. Vincent Abbatecola, who retired from the Board this period. The company would like to thank Vinny for his more than 30 years of dedicated service to the Board and to Hudson Technologies' success. Together with our current members of the Board, these new members and other changes fortify the Hudson Board by expanding our financial and operational depth of expertise and variety of perspective. As we've discussed on previous calls, our capabilities place us at two important points in the refrigerant supply chain: as a provider to wholesalers who supply contractors working in the residential and light commercial space and as a direct supplier to customers with 24/7 cooling needs such as supermarkets and industrial facilities. This provides some resilience to our earnings. And with our new team in place, I believe we are very well positioned to expand our leadership position in refrigerant recovery and reclamation while we explore new opportunities as our industry and customers adapt to an always-changing refrigeration market. A couple of other notes here of importance. Regarding the status of our rescinded DLA contract, Hudson continues to support DLA while it updates its award procedure in response to a competitor's challenge earlier this year. We cannot predict the outcome, but we remain confident in our successful track record servicing the DLA and expect a favorable outcome when the analysis is complete. In this time of uncertain political change, I'd like to take a moment to speak to certain regulatory forces and their potential impact on the company. The strong regulatory tailwind provided to reclaimed refrigerant providers like Hudson by enactment of the AIM Act in 2020 remains a cornerstone of EPA's plans to step down HFC use another 30% by 2029. Recovered and reclaimed refrigerants are expected to fill the void between reduced supply of virgin refrigerants and actual market demand from legacy HVAC systems for HFCs. We do not expect this AIM Act-driven supply-demand imbalance to change materially. But we have seen our efforts in some states like California and New York and some other climate alliance states to legislate accelerated reduction in the use of high-GWP refrigerants in favor of reclaimed refrigerant for some segments, while other efforts by other parties have sought to slow or alter the phasedown schedule over primarily economic or logistic concerns. The outcome of these competing efforts is unclear. However, Hudson is well positioned through our supply of legacy HFC refrigerants and new capabilities to support their replacement products to continue our growth regardless of the outcome. Also, given the current macroeconomic environment with rapidly changing and unclear domestic policies, higher consumer prices and damaged global trading alliances, the potential impact on refrigerant supply is difficult to estimate and always a concern to the business. We will continue to monitor it. So in closing, we used the first quarter to execute important organizational and operational imperatives outlined previously and in accordance with our strategic plan. Our performance in the first quarter reinforces my belief that we are uniquely positioned with the right people, products and services needed to continue our core growth and improve our leadership position in value-added refrigerant life cycle management solutions. We are focusing on driving organic growth through our ability to provide refrigerants through our extensive national footprint and building our recovery and reclamation capabilities today while exploring real opportunities to further innovate with the goal of diversifying our revenue stream and reducing seasonality in the future. Our first quarter results reflect trends that should provide a solid platform for the 2026 selling season. Now I'll turn the call over to Brian Bertaux again to review our first quarter 2026 financial results. Go ahead, Brian.

Thank you, Ken. I'll review our Q1 2026 financial results with a comparison to Q1 2025. We recorded revenue of $60.2 million, a 9% increase compared to the $55.3 million posted last year. As Ken mentioned, revenue came in higher than we anticipated, driven by strong sales volume and organizational execution as well as warm weather in the Western U.S. Gross profit was $11.8 million in the quarter and gross margin was 20% compared to gross profit of $12.1 million and gross margin of 22% last year. The Q1 2026 gross margin declined slightly, primarily due to the mix of refrigerants sold as compared to last year. The Q1 2025 sales mix included a broader range of higher-priced and higher-margin HFO refrigerants as contractors topped off newly installed equipment as the systems first entered the marketplace. We expect gross margin to improve as we continue through the selling season. Hudson recorded SG&A expenses of $9.5 million compared to $8.2 million in Q1 2025. The increased SG&A spend was primarily related to the post-implementation enhancement of our ERP system and continued focus on strategic initiatives. Operating income was $1.5 million compared to $3.1 million in Q1 2025. This variance was mostly attributed to the higher SG&A expense. Income before income taxes was $1.6 million compared to $3.7 million in Q1 2025. Income tax expense was $1.3 million compared to $900,000 in Q1 2025. The increased income tax expense for the quarter relates to approximately $900,000, or $0.02 per share, in income tax expenses related to a non-operating item as well as executive stock compensation. We recorded net income of $300,000, or $0.01 per diluted share, compared to net income of $2.8 million, or $0.06 per diluted share, in Q1 2025. The company's unlevered balance sheet remains strong at March 31, 2026, with $19 million of cash, and we are positioned well from a working capital perspective as we enter the selling season. During the first quarter, we purchased $2.5 million of common stock as part of our opportunistic buyback program. Now I'll turn the call back to Ken for his closing remarks.

Thank you, Brian. As we continue through the 2026 selling season, we're focused not only on driving success this year but on positioning Hudson to capitalize on opportunities to deliver strong long-term growth and profitability. Our additions to the management team and the Board demonstrate our commitment to intensifying our strategic initiatives while driving operational excellence. Again, Hudson is uniquely advantaged by the combined strength of our extensive customer base, industry partnerships, national footprint, proprietary technology, and decades of expertise in this industry. Our focus now is to leverage these advantages to enhance our capabilities and open up new opportunities.

Please continue to hold. We'll have our speakers reconnected once again shortly.

I'm sorry, we've had technical difficulties tonight, but we're going to open the line up now, operator, for Q&A.

The operator provided instructions. The first question comes from Ryan Sigdahl with Craig-Hallum.

I want to start with gross margin. I get the year-over-year compare. But when I look back, it's the lowest Q1 since before COVID. So I'm curious, given HFC pricing was up year-over-year and quarter-over-quarter, what's going on on the gross margin side?

I would just tell you, it is a tough comp against last year's first quarter. And remember that our Q1 and Q4 are our lowest margin quarters, and we are still sticking with our overall guidance of, say, mid-20s for margin overall. So it's just a low point for the year or just call it out a season, and we expect to pick up margin into Q2 and Q3.

Yes. I was looking at Q1 to try and be seasonally comparable when I went back. I think previously you had said flat to up slightly for the year. Now mid-20s maybe saying the same thing, but gross margin was 25% last year. Is it still 25% or better?

Yes, correct.

ERP transition, are you willing to quantify how much of an incremental cost that was? And then if any of that is lingering still in Q2 or the rest of the year?

We don't want to go into great detail on it, but let's just say it was a strong contributor, probably half of the increase year-over-year. And yes, as Ken noted, we'll continue to invest in optimizing the ERP system throughout the rest of the year. So we'd expect the same level of SG&A activity.

Ryan, do you have any follow-up?

I do, but if they're not there...

Did you not hear us?

All right. You're back.

Yes. Did you hear the answer to the question, Ryan?

I think I caught most of it. Well, maybe just for my last question, just on the early season weather, which you called out, but we certainly had a nice stint of warm weather well earlier in the Northeast, et cetera. Can you talk through the activity that's been happening from a preseason standpoint and what kind of narrative it is from the industry as we head into the summer selling season?

Thanks, Ryan. So you're correct; there was a heat dome that hit the Southwest much earlier than anticipated that drove folks to look to increase inventory and maybe there were lingering questions about what happened last year to make sure that they had product available. Right now, it looks like that's normalized or regressed back to where we would normally expect it. So no more large excursions on the outlook.

Our next question comes from Jason Tilchen with Canaccord Genuity.

I guess to start, as it relates to the Q2 guide, can you sort of unpack some of the trends at the beginning of April and what's contemplated in terms of volume compared to pricing? And then also on the gross margin, you mentioned that improvement is expected throughout the year. Anything else in terms of some of the key puts and takes and the cadence maybe Q2 versus the second half?

We gave our revenue guidance, and it's kind of the same story as Q1, where we'll expect better volume year-over-year in Q2. But with that 454B shortage last year, all refrigerants, HFOs and HFCs, had a lift in Q2 and Q3, and then pricing came back down as the situation normalized. So therefore, we're expecting higher volume, but less from pricing; we'd expect pricing to be lower than last year because of that event with the HFO shortages.

Last quarter you talked about some of the opportunities that you're exploring to diversify into some adjacent areas on the services side. Can you provide an update on those efforts? What are some of the gating factors to keep in mind as you're looking to make those moves and what's excited you about those opportunities thus far?

I did indicate that we're looking to diversify revenue and improve quality perhaps and reduce the seasonality of the business. We have identified several interesting opportunities. Not really in a position to go into any great detail right now, but there are significant activities in this industry that we are looking to take advantage of.

One last follow-up. In the prepared remarks, you mentioned some uncertainty in the global supply chain being a tailwind to demand in the quarter. Can you expand on that a little bit? And has that persisted into Q2? How much of that is baked into the guidance you provided?

Sure. So refrigerant producers rely on certain materials coming through the Gulf and other places — certain feedstocks to produce refrigerants. The intel that we get from refrigerant producers is that those costs are increasing, and we're starting to see lift to prices as a result and increases being passed through the channel by the producers due to this uncertainty and some other factors, but mostly uncertainty around supply through the Gulf of raw materials. There's generally uncertainty in the market about where prices are going and consumer confidence and inflation are all not going in the right direction. That tends to favor repair over replace in our industry, and repairing equipment over replacing equipment tends to favor legacy HFC source and supply, and that's where we're well positioned to take advantage of that. So it's an uncertain time, and we're trying to reflect that uncertainty.

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

This is Matthew on for Josh. In the release, you used the word 'firming,' which is a step up from balanced regarding the pricing momentum. Can you put more color around where R-410A sits today and whether you're seeing the type of seasonal price appreciation that kicked in last May or not?

We are starting to see firming in 410A pricing. As we get closer to the season, we expect that to continue. We're guiding conservatively on where we think it's going to land. Generally, I think it's going to be a little bit consistent with last year's performance.

Separately, do you see any early traction on the Solstice licensing deal for R-448A? Are you seeing any reclamation volumes start to come through there?

We have a licensing agreement for R-448A and R-449A. R-449A is actually a Chemours product; it's been cross-licensed. Those products are forward-looking and primarily for the supermarket segments that converted earlier to those materials. We're just getting underway with that. We haven't seen a lot of traction yet, and we wouldn't expect a lot of traction just now, but we do have materials in-house, we have the capability, and we have gotten interest from parties in California and other areas where those products are dominant. So it's looking very positive, but nothing material to report just yet.

Last question for me. With cash coming down to about $19 million in Q1, how are you thinking about the pace of buybacks versus preserving cash for M&A? What's the capital allocation strategy?

We are unlevered with a cash position, and we'd expect this to be the low point for the year. So we expect to be generating cash flow. We'll continue to apply our capital allocation strategy with opportunistic share repurchases and always looking at strategic opportunities.

We have reached the end of the question-and-answer session, and I will now turn the call to Ken for closing remarks.

All right. Thank you, operator. I'd like to apologize for the technical difficulties we've had tonight on the line. We do not understand that, but we will figure it out. I'd also like to thank our employees for their commitment to our success this quarter and to thank all of you for your interest and support of Hudson Technologies' mission and commitment to sustainable practices around refrigerant life cycle management. We look forward to speaking with you again in August to discuss our second quarter results.

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