Hudson Technologies, Inc.

Welcome to the Hudson Technologies Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I will now turn the conference over to your host, Jennifer Belladeau. You may begin.

Thank you. Good evening and welcome to our conference call to discuss Hudson Technology's financial results for the third quarter 2023. On the call today are Brian Coleman, President and Chief Executive Officer, and Nat Krishnamurti, 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 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 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 Brian Coleman. Go ahead, Brian.

Good evening, and thank you for joining us. We delivered solid third quarter results, which included continued profitability and strong cash flow, to close out our traditional nine-month cooling season. That said, as we expected, on a comparative basis, third quarter 2023 revenue margin decreased relative to the significantly strong revenue margin performance achieved in 2022. The primary driver for the comparative decrease was a 27% decline in the sales price for certain refrigerants when compared to the third quarter of 2022. As we detailed previously, throughout most of 2022, we saw substantial sale price increases without a corresponding increase in inventory price. Conversely, the 2023 cooling season was characterized both a challenging pricing environment and lower sales volume for the nine-month season. Specifically, for the nine-month period, we saw a decline of approximately 17 percent in the sale price of certain refrigerants as compared to the first nine months of last year. In addition, the late arrival of warmer weather to many parts of the U.S., which impacted demand for certain refrigerants, slightly impacted volume unfavorably for this season. Even with the significant pricing headwinds, we achieved our gross margin of 40%, which is slightly higher than our long-term targeted gross margin levels. Margins were favorably impacted again this quarter, similar to what we saw in the second quarter this year, from higher margin carbon sales and from sales related to the DLA contract. Without those additional contributions, gross margins would have been closer to 38%. As we mentioned last quarter, we are tracking toward the highest annual revenue from our DLA contract. From our vantage point, we remain comfortable with our long-range gross margin target of 35%. Our ability to consistently deliver strong, profitable, and operating cash flow allowed us to aggressively pay down our debt during the last several quarters, and that progress culminated with the full repayment of our term loan during the quarter. Notably, we are very pleased to achieve the full repayment well ahead of our March 2027 maturity date, and we anticipate that the elimination of this debt will enable us to further reduce our interest expense and improve our balance sheet. As you know, our industry is preparing for the unprecedented 40% baseline reduction in Virgin HSC production and consumption allowances, which will be effective at the start of 2024. We believe that the current phase-down represents a significant opportunity for our business. With the current installed base of HSC equipment, which is currently estimated at 125 million units, the aggressive reduction in virgin HSC production is expected to meaningful impact the supply landscape, creating enhanced demand for reclaimed refrigerants over time to fill what is anticipated to become a substantial gap between HSC supply and demand. Additionally, the reclamation industry is positioned to benefit as the regulatory environment around refrigerants and cooling equipment becomes more stringent. There are ongoing efforts on both the state and federal levels to require tracking and detailed reporting designed to keep track of refrigerants from cradle to end of life as a means to deter the practice of venting and to encourage reclamation. Many of you have likely seen the EPA's rules issued in early October. The first was the finalization of the technology transition rule, and the agency also published the long-awaited proposed refrigerant management rule. We are encouraged by the bold initiatives that the EPA has taken around the proposed refrigerant management rule, particularly those that outline potential mandates for the use of reclaimed refrigerants by OEMs for new systems and the use of reclaimed refrigerants in servicing activities. These proposed initiatives will require a significant increase in reclaimed volumes, particularly for higher GDP HFCs such as 404 and 410 . I want to stress that the refrigerant management rule is a proposed rule which is currently making its way through the commentary process, but we are pleased with the aggressive stance set forth by the EPA. It's encouraging to see a broader proposed regulatory focus addresses venting deterrence, which should also increase the pool of refrigerant that can be recovered, and also promotes the adoption of lower GDP cooling technology and the use of reclaimed refrigerants. Hudson has an advantage as the industry shifts because we've long been a proponent and a practitioner of the circular economy of refrigerants and proper refrigerant management. Importantly, our technology is agnostic. We've been recovering and reclaiming refrigerants since the early 1990s, and our technology works with any and all types of refrigerant, from legacy CFCs and HFCs to today's HFCs and to future HFOs. Our operational model can essentially provide a closed loop in which refrigerant is sold into the market for new equipment or for servicing cooling systems. And later, when service is required or the system reaches end of life, the gas is recovered and returned to Hudson for reclamation without any emission to the atmosphere. So we believe that we are uniquely positioned with our proprietary reclamation technology, as well as our system optimization and conversion services, to grow our leadership role in the shift of lower GDP refrigerants and cooling technologies. Longer term, we believe industry stakeholders will increasingly embrace the environmental benefits of using reclaimed refrigerant, which is nearly a zero GDP gas. Our ability to reclaim refrigerant is dependent on recovering refrigerant, and we have focused on working with customers who share our commitment to the circular economy for refrigerants. We have also been very active at industry forums and conferences promoting our vision for the adoption of sustainable and responsible refrigerant management among our industry partners. Recent events and discussions that we have attended include the Green Build Conference, the Allied Air Conference, and several state Plumbing, Heating, Cooling Contractors Association meetings. In July, Hudson's Emerald Refrigerant, our Reclaimed Refrigerant brand, was named Top Product of 2023 by Environment Plus Energy Leader, an awards program that recognizes excellence in products and projects that deliver significant energy and environmental benefits. We also recognize the importance of participating in global efforts to raise awareness and accelerate the global transition to efficient and climate-friendly cooling alternatives. In early October, Hudson announced that we joined the COOL Coalition, a global multi-stakeholder network assembled by the United Nations Environment Program, that connects a wide range of key participants from government, cities, international organizations, businesses, finance, academia, and civil society groups to facilitate knowledge exchange, advocacy, and joint action toward climate-friendly cooling alternatives. And I just returned from Nairobi, where last week Hudson participated at the 35th meeting of the parties of the Montreal Protocol on substances that deplete the ozone layer. We're pleased to have these opportunities to share our expertise and interact with other stakeholders on a global level. As we move through the balance of 2023, we remain focused on continuing to be a reliable resource to our customers by providing sustainable and responsible refrigerant management support. The fourth quarter of any given year is historically our lowest revenue gross margin quarter, as we saw in 2022, with significantly lower sales volume as the cooling season ends and many of our customers have moved their focus to heating applications. We believe that 2024 will represent an inflection point for the HSC market, and we are confident that our industry-leading reclamation technology, distribution network, and optimization and conversion capabilities provide a strong foundation to grow our company and extend our leadership position as our industry embraces more sustainable and environmentally friendly practices and products to meet the growing worldwide demand for cooling and refrigeration solutions. This is an exciting time for our company and our industry, and we look forward to expanding the reach of our products and services as our industry continues to evolve. Now I'll turn the call over to Nat to review the financials. Go ahead, Nat.