Hudson Technologies, Inc.

and welcome to the Hudson Technologies fourth quarter and full year 2024 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. Should you wish to join the queue to ask a question at any time, you may press star one on your telephone keypad. Should you wish to remove yourself from queue, you may press star two. It's now my pleasure to turn the floor over to Jen Belladeau, of IMS Investor Relations. Jen, the floor is yours.

Thank you. Good evening, and welcome to our conference call to discuss Hudson Technologies' financial results for the fourth quarter and year-end 2024. On the call today are Brian Coleman, President and Chief Executive Officer, and Brian Berto, Hudson's 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 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. Please go ahead, Brian.

Good evening, and thank you for joining us. Our fourth quarter unfolded largely as expected, closing out what was a challenging year. As many of you know, our fourth quarter has historically been characterized by seasonally slower sales activity compared to our nine-month selling season, and this year was no exception. Brian Berto will provide details about our financial results a little later in the call, but at a high level, full year revenue of $237 million was slightly below our revised target of $240 million. We achieved a revised full-year gross margin target of 28%. We further strengthened our unlevered balance sheet as evidenced by our cash position of $70 million and no debt at December 31, 2024. And after establishing our stock repurchase program during the third quarter, we repurchased a total of $8.1 million of common stock in 2024. As we previously discussed, our 2024 cooling season was impacted by decreased pricing for certain refrigerants, and our full year results reflect that pricing dynamic, as well as lower revenue from our DLA contract as compared to 2023. As we reported, HSC pricing in 2024 declined up to 45% throughout the sales season, and we ended the year with no price improvement. However, our actual sales price decline was not as severe as the market due to our diverse sales channels, which include direct-to-wholesalers and direct-to-end customers, such as supermarkets, chemical plants, manufacturing facilities, among others. HSC pricing at the close of 2024 was just under $6 per pound and remains at this price point as we kick off 2025. As I mentioned last quarter, when we discussed HFC pricing, we're generally focused on the price of HFC 410A, which represents about 70 percent of the total aftermarket demand for HFCs. For the moment, there is no material demand for refrigerants as we've not entered the 2025 cooling season. Certainly, when we report our first quarter results in early May, we'll have a better understanding of any possible supply-demand imbalance But as we've previously noted, we have a concern that upstream inventories may still be at a high level. For the moment, we see the 2025 gross margin ranging from the mid to upper 20s. And certainly on price alone, we will have a difficult comparison to the first quarter of 24 in 2025. Ultimately, we will know the 2024 inventory data from the EPA, but that will likely not be available until the third quarter of this year. To give some context around revenue from the DLA contract, during the full year 2024, we recognized $36 million in revenue from the contract, which was slightly ahead of where we expected normal purchasing levels to be, and we anticipate 2025 will trend to normal purchasing levels. As you may remember, during 2023, we saw a significantly increased purchasing activity of approximately $20 million in revenue through the DLA contract than in any previous year, and we anticipated 2024 to return to a more normalized DLA purchasing level. As we previously discussed, we do not control market pricing for HFC refrigerants, but we are fortunate to have a diverse customer base that allows us to perform better than market. We will always focus on what we control. namely ensuring that our customers have the right refrigerants where and when they need them, and promoting recovery and reclamation activities as our industry transitions to lower GDP equipment and refrigerants. Our established distribution network and longstanding supplier and customer relationships position us well to efficiently meet the market demand for all types of refrigerants, including next generation low GDP refrigerants. And we remain focused on expanding our customer base and market reach. Importantly, a long-term view is that the current phase down of HSC refrigerants create a significant opportunity for our reclamation business. The installed base of HSC equipment will be operable for 20 plus years to come. And as the supply of virgin HSCs become limited, reclaim HSCs will be needed to fill the anticipated supply-demand gap. Additionally, there have been regulatory changes at both federal and state levels to promote and require the use of reclaimed refrigerants. On the federal level, in September, the EPA published its final refrigerant management rule, which, among other directives, mandates the use of reclaimed refrigerants for servicing in certain sectors of the market beginning in 2029, and thereby banning the use of newly manufactured or virgin refrigerants for servicing. This is the first time our industry has seen a federal requirement for the mandatory use of reclaimed refrigerants in certain sectors, and we believe this represents a strong step forward in the drive toward broader use of reclaimed refrigerants. Recently, there's also been promising legislation active among the states. led by California, which has implemented laws to prohibit the sale and use of certain newly manufactured high GDP HFCs and has mandated the use of reclaimed refrigerants in their place. At the start of 2025, California also began implementing a mandate for the use of reclaimed refrigerants in state government facilities, thereby prohibiting the use of virgin refrigerants. New York has legislation somewhat similar to California and Washington State has legislation pending with more states expected to follow. We believe that these mandates create an additional opportunity for contractors to follow the law and not intentionally vent refrigerants. We believe that contractors will recognize that venting is no longer sustainable if they plan to serve their customer needs associated with these reclaim mandates. It should be noted that our overall reclaim activity increased by 18% in 2024. We are intent on maximizing our recovery and reclamation capabilities, and our strategic acquisition of certain assets of USA Refrigerants in June of 2024 strengthened our capabilities in this area. Refrigerant recovery is integral to the reclamation process. So our addition of USA and its recovery network, combined with our ongoing efforts to promote recovery in the field, are strengthening our ability to source recovered refrigerants. In terms of our efforts in the field, Hudson pays for recovered refrigerant, and we focused on promoting best practices for recovery of refrigerants during technician training, with an emphasis on the existing mandates for the use of reclaimed refrigerants. We believe that informing technicians about these mandates helps reinforce the message that the practice of venting refrigerants does not make sense for them either financially or commercially. We communicate this message by speaking at cooling industry events and by addressing technician training sessions hosted by our customers. During the fourth quarter, Hudson attended and or spoke at Service World Expo, Green Build, and ACCA, among others. As we move toward the heart of the cooling season for 2025, we believe we are well positioned to grow our role as a leading provider of all types of refrigerants, particularly reclaimed refrigerants, by ensuring we are positioned to capitalize on refrigerant sales, servicing opportunities, and the reclamation needs of our customer base. We remain focused on balancing our commitment to driving a smooth transition for our customers through the current refrigerant phase down, while promoting our industry's continuing evolution towards lower GDP equipment and refrigerants. Now I'll turn the call over to Brian Berto for the review of our fourth quarter financial results.

Go ahead, Brian. Thank you, Brian, and good evening, everybody. I will now review our fourth quarter and full year 2024 financial results with a comparison to our 2023 results. Hudson recorded $34.6 million in revenue in the 2024 fourth quarter, a 23% decrease compared to the 2023 quarter. The decrease was primarily related to lower refrigerant market prices and lower revenue from the company's DLA contract. Fourth quarter gross margin was 17% compared to 31% in the 2023 quarter due to lower refrigerant market prices. The 2024 fourth quarter sequential change in gross margin was consistent with prior years reflecting lower seasonal sales volume. Our fourth quarter SG&A at $8 million came in lower than the $8.5 million recognized in the 2023 quarter. We recorded an operating loss of $3.2 million in the 2024 quarter compared to operating income of $4.7 million in the 2023 quarter. The company recorded a net loss of $2.6 million or a loss of $0.06 per basic and diluted share in the 2024 quarter compared to net income of $3.9 million, or 9 cents per basic and 8 cents per diluted share in the 2023 quarter. Now turning to the full year, Hudson recorded $237.1 million in revenue in 2024, a decrease of 18% compared to 2023. The decrease was primarily related to low refrigerant market prices and lower revenue from the company's DLA contract. Our refrigerant sales volume increased lately over 2023. However, this was more than offset by a steady decline throughout the year in market prices for HFC refrigerants. DLA revenue in 2023 was higher than normal due to certain surge purchases of approximately $20 million. The elevated DLA activity in 2023 made for a tough comp for 2024. 2024 gross margin was 28% compared to 39% in 2023, reflecting lower refrigerant market prices throughout 2024, resulting in margin compression. 2024 SG&A was $33 million compared to $30.5 million in 2023. The increased 2024 SG&A spend includes approximately $700,000 and costs associated with our 2024 exposition of USA Refrigerants and IT-related expenses. In total, we spent approximately $1 million in 2024 pursuing strategic opportunities, and we expected to continue this level of activity on an annual basis for the foreseeable future. The company recorded operating income of $29.3 million in 2024 compared to $78.2 million in 2023 reflecting the previously noted decline in refrigerant prices and tough 2023 DLA comp. We recognized $500,000 in net interest income in 2024, which was a significant shift from the $8.4 million of net interest expense recognized in 2023. Our 2024 earnings before taxes included $2.3 million of non-recurring income primarily related to a favorable outstanding litigation settlement. Hudson recorded net income of $24.4 million or 54 cents per basic and 52 cents per diluted share in 2024 compared to net income of $52.2 million or $1.15 per basic and $1.10 per diluted share in 2023. The company strengthens its unlevered balance sheet ending 2024 with $70 million in cash and no debt. Our capital allocation strategy remains focused on organic and strategic growth, as well as share repurchases. We were pleased with the execution of our capital allocation strategy in 2024, which included the acquisition of USA Refrigerants, as well as $8 million in share repurchases. I'll now turn the call back over to Brian. Thank you, Brian.

As we begin 2025, remain committed to our long-term outlook that the refrigeration and cooling industry ongoing evolution to lower GDP refrigerants and equipment represents a tremendous growth opportunity for Hudson. Our progress might move intermittently at times due to factors we do not control, but our management team is very good at execution in areas that we do control, with particular emphasis on purchasing more recovered refrigerants which yield higher gross profits and margins when sold as compared to the distribution of newly manufactured refrigerants. Operator, we'll now open the call to questions.

Thank you. The floor is now open for questions. If you would like to join the queue to ask a question at this time, please press star 1 on your telephone keypad. We do ask if listening on speakerphone today that you pick up your handset while asking your question to provide optimal sound quality. Once again, please press star one on your keypad now if you wish to join the queue to ask a question. Please hold a moment while we poll for questions. And the first question today is coming from Jerry Sweeney from Roth Capital. Jerry, your line is live. Please go ahead.

Brian one and Brian two, thanks for taking my call.

Which is one and which is two?

I'm going to let you decide.

All right, thank you.

I was going to bring that up, but yes. We'll go in order of age. Just curious as to how much visibility you have into the channel, and will you be able to see maybe some of the destocking upstream as it develops, or if you have the ability to talk to some of the clients and understand where they are in that process?

Well, you know, back to what we suspect, we do expect that the inventory totals when reported for 24 will be lower than 23. And we think a good bit lower because of the 30% reduction in the allowances in the 24 year compared to the 23 year. believing that the overall demand would have been very similar in 24 to 23. Obviously, when the data comes out, we'll confirm that. So we think there's been some decline in the upstream inventory balances, but it's still, we think, fairly significant. And so we're being cautious about 25 right now and sort of setting the stage that, obviously, it's still well before the cooling season. The prices haven't changed. They may, but we probably won't see that until we start to get into April and certainly by early May when we report the first quarter results.

Got it. You know, with that in mind and looking at your inventory at the close of the year, I think there were 96 million. You did mention something about inventories at the end. I didn't catch all that, so this is redundant. I apologize. But looking at your inventories around 96 million, Are you in good shape for that, or will you continue to go out and maybe purchase or be more aggressive with gas or just play normal? Eventually, the channel is going to clear, and this could be a good opportunity to gain inventory, especially with your balance sheet. Just wanted to see how you think of that.

Historically, we just manage our inventory levels with the intent of being able to sell the inventory within the next season. We generally don't carry even a full year's worth of inventory. So the dollars you see in inventory and how the inventory dollars are coming down are not necessarily volume, but price particularly, that we're trying to reload the inventory at lower prices. Now, we thought probably when we reported Q2 that our cost basis was stabilizing relative to the sale price. But unfortunately, the sale price declined further from Q2 into Q3. So we do think going forward, there'll be some more room to lower dollars in inventory just on price alone as we go through the 2025 sale season.

I think I got that. I may have to follow up with that later, but I think I got that. Okay. Got it. And final question. I'm not sure if you'll answer this, but I'll throw it out there. Obviously, reclaim is part of the business. Distribution is, I think, a version gas still remains a portion of your business. Just curious on access to gas on that front and what percentage of revenue of that or how important does that play into just general revenue and business operations and leveraging assets?

Yeah, I mean, HFCs still are dominated by virgin supply. And then, therefore, that would be true for Hudson. Now, certainly because we're a reclaimer and able to access reclaimed HFCs, our percentage might be different than others. But still, HFCs are single digits relative to the overall HFC demand.

Got it. Okay, got it. I'll jump back in queue. I appreciate it.

Thank you. Thank you. Your next question is coming from Ryan Figdale from Craig Hallam. Ryan, your line is live. Please go ahead.

Hey, good afternoon, Brian, Brian. I want to start with the DLA contract. So, one, have you seen any impact from whether it be Trump and kind of the administration change, the doge cuts that are happening. And then as you look at kind of the new contract that's up for renewal and rebid right now, does anything change from a timing standpoint, still expect a decision in the summer? And then as far as the bid process goes, I guess anything significant that's changed from your expectation of what Hudson's margins can be with that renewal?

Yeah, so back to the contract, there's several hundred line items, and they're all really consumable line items. There is no guaranteed demand relative to the contract. That's why it's difficult to estimate what an annual revenue might be. But again, we think it's going to be in that low to mid-30s for 2025. We don't see any administrative activities that's going to negatively impact or at the moment positively improve that outlook relative to what we think we'll achieve in 2025 related to the contract. As it relates to the successor contract, the bid proposals went in, but went in later than the original timeline. So we think it'd be more likely the back half at a later part of 2025 when we hear the results of that process and who will be awarded with the next contract.

And then just as you think about tariffs, trade wars, do you think that'll have any impact or you see any impact from usage of allocations for 2025 of potentially pulling those early into the year or maybe even pushing them late?

Well, as it relates to refrigerants, we already had very, very large tariffs on the Chinese-produced HFC refrigerants in pretty much almost every class, whether they be individual components or blended products. The tariffs range probably from 200% to like 285% already. Where I think for the moment we're going to see more of an impact, a direct impact, would be on some steel tariffs. And if you think about some of the tariffs that are being put in place on steel, that could impact the cost of cylinders. And we have a large reusable cylinder fleet, so we don't need to really buy a lot of reusable cylinders just to kind of fill in as end of life comes out of that fleet. But as it relates to disposable cylinders, which go towards the smaller sized refrigerants for mainly residential like commercial, we think we're going to see some price increases on the cylinders. And we're expecting to be able to pass those price increases through the channel because we would expect most of the other suppliers of refrigerants to that channel would likely do the same.

Great. Thanks, guys. Good luck.

Thank you. Your next question is coming from Josh Nichols from B Reilly. Josh, your line is live. Please go ahead.

Yeah, thanks for taking my question. Just kind of curious with like the switch over for new OEM equipment to this hybrid refrigerant, just still early days. I mean, some other peers have said that you may not see the impact until like 2Q or whatnot, but I'm just curious your thoughts on how that may impact inventory levels or potentially like the pace of the stocking for 2025?

So the newer equipment and the equipment transition rule is kicking in this year. The products that would have been stockpiled really are related to the HFC legacy systems. So products associated with either the components to 410A or 410A as an example. Right now, there is market disruption as it relates to the transitioning to the lower GDP systems, mainly related to current demand and supply, but likely as it relates with any transition, you run into that in the early days and then quickly the industry catches up with availability on both the equipment and on the refrigerant side. There is some chunkiness right now as the lower GDP equipment is being launched. There is definitely sell-through of the legacy equipment, so we'll likely see a lot of 410A units being sold in the 25-year and installed in the 25-year. And all these different supply issues on the transition of the lower GDP equipment should clean themselves up in the next few months.

Thank you. Brian, I know that Primary, of course, focused on reclamation, but you do also sell some historically, like Virgin HFCs, lower margin, granted, than the reclamation side of the business. I think it's like 20% for Virgin. Is that something that you guys... I guess, would still be doing much of, or would you be able to do that for the new refrigerants as well? Because the pricing for the newer refrigerants going into OEM equipment is presumed to be higher than HFCs, given the transition that's going on, or would you not really be impacted by that?

Well, we definitely technically can reclaim replacement refrigerants. It probably, though, will be a while before you start to see any material amounts of that because they have to be installed and then problems have to occur and so forth. Where the concern could be about what reclaim activity we could do or volumes is around some of these replacement low-GOP refrigerants are under patent. And because they are multi-component, We want to make sure that we're not upsetting any relationship to any patent rights and things like that. So those are things that will get worked out over the next number of years as these replacement systems get installed and eventually start to run into problems. But for the near term, we're pretty much going to see large volumes of HFCs coming back. We're, you know, discussed this evening strategies to grow our overall volume of recovered HFCs, and we expect to continue to do that in 2025 and beyond.

Thanks. And then last question for me. I mean, we talked a lot about HFCs, but just some of the older stuff like R22, As that continues to age out, have you seen any major shifts in terms of demand or pricing on that front, or does that continue to hold pretty steady at a much higher price with relatively steady volumes?

Well, the volumes will decline slowly over time and have been declining, and you can see that really as reported through the EPA reclaim data. So you'll see that R22 reclaimed volumes on an annual basis continued that downward slope. And that downward slope is likely going to tie into how demand is declining as well. So for the most part, R22, using R22 as the reclaim proxy, R22 is stable and has been pretty stable relative to supply and demand and really not influenced in the way the HFCs have been because HFCs are the class of refrigerants where there's an upstream stockpile.

Understood. Thanks, Brian.

Thank you. Your next question is coming from Austin Muller from Canaccord. Austin, your line is live. Please go ahead.

Hi, good afternoon. So just my first question, do you have any updates on potential overseas licensing opportunities of portable distillation equipment?

I'm sorry, are you asking the question about Hudson licensing equipment?

Yes. or rather of customers overseas being able to use your licensed equipment?

So we have over the years a handful of relationships where we've worked with organizations that already have an HVAC business and infrastructure and have licensed our equipment and our proprietary distillation know-how. We're definitely looking to do more of that. We're spending a lot more time at the meeting of the parties for the Montreal Protocol, listening to developing nations, trying to understand how we might help there. But almost always, we're going to look for a partner that already has an established business that could make sense for us to try and license our technology, but nothing current in the recent months.

Okay. And just a second question. Do you think it's possible there could be changes to the production cap for HFCs allowed under the new Congress? Or do you think that the chemical manufacturers are more focused on transitioning to HFOs and Congress likely won't change anything?

Well, we focus mainly not so much the production, but the consumption cap. And it's really that first fill or that first sale inside the United States borders that relative to the allowance system. But if there was to be a change to the allowances, that would have to be legislated. Congress would have to construct a bill, and then it would have to pass the House and Senate, and then obviously executed by the president. There's no, to my knowledge, there's no industry members or anyone advocating for any changes to the existing AM Act. There was a congressional review process on the refrigerant management rule that was issued by the EPA in September of this year, which in part included the mandates for the use of reclaim. It doesn't look like that congressional review of that particular rulemaking is a priority for the current Congress. When we looked at the list from the House majority leader, relative to the congressional review projects or process, anything associated with the AMAC didn't appear to be a priority for them.

Great. That's very helpful. Thanks for the insight.

Thank you. This does conclude today's question and answer session. I would now like to turn the floor back to management for closing remarks.

Thank you, operator. I'd like to thank our employees for their continued support and dedication to our business, and both our long-time shareholders and those that recently joined us for their support. We look forward to speaking with you after the first quarter results. Have a good night, everybody.

Thank you. This does conclude today's conference call. You may disconnect your lines at this time and have a wonderful day. Thank you for your participation.