Hudson Technologies, Inc.

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. 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, Jen Belladeau. You may begin.

Thank you. Good evening and welcome to our conference call to discuss Hudson Technology's financial results for third quarter 2024. On the call today are Brian Coleman, President and Chief Executive Officer, and Brian Berto, Hudson 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 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 31st, 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 for the third quarter revenues decrease, 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, HSC 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 this 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 begin to outstrip supply. We've 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 HSC phase-down. We are committed to executing our long-term growth strategy to capitalize on HSC phase-down 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 the 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 GDP 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 and 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 an end of life for 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 it 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 GDP 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, reclaim pounds grew by approximately 20% in 2023 as compared to 2022. So we're pleased to see the growth in reclaim, 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 reclaim activity in future years. The EPA also chose to provide recovered pounds data by reclaimer, which it has never 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 reclaim 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 reclamation, 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 pound 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 HOC reclaimed pounds for 2023 is in the 20% plus range, with R410A at approximately 25%. And for the moment, it's unclear whether a certain amount of the recovered HFC stockpile from the 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 stockpiled recovered refrigerant. While in the past, tracking the recovered pounds was never a concern of Hudson's, 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 31st, 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 phase down, 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 HSC inventory was 388 million metric tons of CO2e at the end of the year when HSC consumption had been curtailed to 90% of the cap. At December 31st, 2023, the second year of consumption at 90% of the cap, HSC 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 23. In 2024, consumption allowances were reduced to provide for 60% of the original cap. And 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 less 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 R410A refrigerant. As the availability of HSCs decreases to meet EPA phase-out 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 GDP. 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 GDP refrigerants. Now I'll turn the call over to Brian Berto to review our third quarter financial results. Go ahead, Brian.