Hudson Technologies, Inc.

Good afternoon, ladies and gentlemen, and welcome to the Hudson Technologies Third Quarter 2021 Earnings Call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, John Nesbitt, IMS Investor Relations. Sir, please go ahead.

Thank you. Good afternoon, and welcome to our conference call to discuss Hudson Technologies financial results for the third quarter 2021. On the call today are Brian Coleman, President and Chief Executive Officer, and Nat Krishnamurti, 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, and 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 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 these elements can change and in certain cases are not within our control, we would ask you to consider and interpret them in that light. We urge you to review Hudson's most recent Form 10-K and other subsequent SEC filings with a discussion of the principal risks and uncertainties that affect our business and our performance and are the factors that could cause actual results to differ materially. With that, we'll now turn the call over to Brian Coleman. Go ahead, Brian.

Good evening, and thank you for joining us. Our third quarter delivered a very strong close to our nine-month selling season, as demonstrated by substantial revenue growth, significantly improved margins, and improved profitability. Our improved performance was primarily due to the significant increases in average sales pricing across our portfolio refrigerants, which far outweighed the decrease we saw in volume in the third quarter. We attribute the decrease in demand largely to three factors, a greater attention to our customer value proposition and realigned sales strategy focused to prioritize long-term higher margin customers, a slower than anticipated reopening of certain commercial locations, and the impact from global supply chain shortages. As we conducted the final integration of Aspen Refrigerants, we enhanced and unified our sales team towards implementing a strategy which renewed Hudson's focus on higher margin long-term customers. Our current leadership team has been examining the inherited Aspen sales approach that in certain instances focused on higher volume sales at the sacrifice of gross margins. As we previously discussed, our industry is rapidly evolving, and for some time now, we've been carefully evaluating our sales strategies to maximize value as we begin navigating the new landscape created by federal legislation, such as the AMAC, and the state-level initiatives. As we enter the initial stage of the AMAC phase-down of Virgin HSC production, it is critical that we ensure we have the inventory to best support our longstanding higher margin customers. Not only has our analysis been important for the 2021 season to establish a baseline of profitability, but is a necessary step to identify the customers who we anticipate will be with us for the long haul, both as refrigerant buyers as well as sources of used gas. As it relates to commercial cooling, we believe that over time the demand headwinds caused by COVID will be eliminated as commercial space continues reopening and volumes will return to more normal cooling demand. Lastly, the global supply chain shortages have also impacted on occasion our ability to meet a portion of emergency response demand from customers this quarter. We are proactively managing our inventory to mitigate the challenging supply chain issues that we and many American businesses are facing to ensure that we can provide uninterrupted service to our customers. From a pricing perspective, during the third quarter, we saw average selling prices of many refrigerants remain strong and increase from the Q2 levels. With the end of the selling season, we believe prices will remain stable through the fourth quarter, and we believe we will see further price increases in the 2022 season as the implementation of the AMAC phase down begins. If we look to Europe as guidance for pricing relative to the initial steps taken under the HSC phase down there, we could expect to see a further doubling or more in prices for HSC refrigerants in the foreseeable future. This pricing dynamic should be a stimulus for growth and reclamation. I'd like to take a minute to discuss our gross margin performance. The significantly improved gross margin in the third quarter is primarily related to higher selling prices of certain refrigerants and the elimination of certain lower margin sales. As you know, we take a FIFO approach to inventory accounting, and during the third quarter, we were largely selling inventory that are required at lower cost. So our gross margin performance benefited from this dynamic. Moving forward through the close of the calendar 2021 and into 2022, we expect to see a return to more historical gross margin performance in the upper 20s to the low 30% levels, as we expect to acquire HSC refrigerant inventory at higher price points for next year's sales season. We could begin to see gross margin improvement over historical levels with the growth in HFC reclamation volumes, which typically results in lower acquisition costs compared to version purchases. But that benefit to gross margin from increased reclaimed supply will probably begin during the 2023 season. As I mentioned a moment ago, legislative activity continues as our industry adopts new regulations to drive the transition to more environmentally friendly refrigerants. During the quarter in September, the EPA published the final rule allocating allowances for the production and consumption of HSCs as mandated by the AMAC and introduced a step-down of 10% in 2022 from baseline levels. As a reminder, the AMAC, which was passed in December of 2020, requires the phase-down of HSC virgin production over the next 15 years with a cumulative 40% reduction in the baseline scheduled to take place in just over two years. Reclamation will be critical to maintaining necessary HFC supply levels to ensure an orderly phase-down. As a leading reclaimer, we believe this presents a significant long-term opportunity for Hudson to act as an HFC supplier while also transitioning away from the production of virgin HFCs. Remember that Hudson reclaims all refrigerant gases, including CFCs, HCFCs, HFCs, and HFOs. As we expected, Hudson received an allocation allowance for the calendar year 2022 equal to approximately 3 million metric tons exchange value equivalents, or 1% of the total HFC consumption, with allowances for 2023 and beyond to be determined at a later date. We expect that the reduction in virgin HSC supply will help accelerate reclamation activity in the near term. With the final HSC allowances in place, we believe we are competitively positioned through both our reclamation capabilities, our robust distribution network to capture market share as both a supplier and a reclaimer, serving the large and growing installed base of HSC equipment. We support the global efforts to transition our industry to more environmentally friendly gases, and we believe we have a unique opportunity to provide a sustainable alternative to virgin refrigerants as the HOC supply tightens. We are also optimistic regarding opportunities associated with the state-level legislations, such as the refrigerant management program established by California through CARP. Among other initiatives, the CARP program is proposing a requirement that OEMs use a minimum 10% reclaimed refrigerant and factory-charged equipment. So with California leading the way, we are encouraged that we will become a leader in helping companies comply with potential state-imposed refrigerant regulations. Hudson represents approximately 35% of refrigerant reclamation activity in the U.S., uniquely positioning us to support the phase-down of virgin production of HOC refrigerants and to serve as a key resource in the circular economy of refrigerants. We are energized by the opportunities we are seeing, not only to grow our business, but also to provide our services to benefit the environment. Now we'll turn the call over to Nat to review the financials.