Hudson Technologies, Inc.

Greetings. Welcome to the Hudson Technologies second quarter 2026 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, John Mesbitt of IMS Investor Relations. You may begin.

Thank you, good evening, and welcome to our conference call to discuss Hudson Technologies' financial results for the second quarter of 2026. On the call today are Ken Gaglione, President and Chief Executive Officer, and Brian Bertaux, Chief Financial Officer. I'll take a moment to read the Safe Harbor Statement. During the course of this conference call, we'll 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 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 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 the factors that could cause our actual results to differ materially. With that, we will now turn the call over to Ken Gaglione. Please go ahead, Ken.

Good evening, and thank you for joining us to discuss our second quarter results. The refrigerant selling season is underway, and I am generally pleased with our strong second quarter results against some rather challenging market and business conditions. Our priority remains long-term value creation, including our focus on operational excellence through the improvement of our core capabilities and longer-term efforts to create less cyclical, more diversified sources of revenue with the goal of reducing our dependency on spot refrigerant pricing. We continue to execute on that vision in the second quarter by investing in the talent and technology we need to accomplish these goals with the backdrop of weaker than expected HSC market prices, illustrating the importance of shifting our business model to have less exposure to variations in pricing dynamics. We're in an inflationary economy, and this tends to favor repair versus replacement of HVAC units and resulting demand for aftermarket refrigerants, but this is counter to what we saw in the quarter. There are several possible reasons for softness in HFC prices. At this point, we can only speculate that a few factors are contributing to the softness, including recent information we've seen about illegally imported refrigerants coming across the southern border, excess channel inventory, or simply that while there have been short bursts of higher temperatures this summer, we haven't really seen a prolonged period of hot weather for a long enough period of time. The industry is acting on the question of illegal imports, and we're optimistic the situation will improve in the long run. Additionally, the forecasted El Nino effect and accompanying warmer weather may also benefit our business as we round out the selling season. For the quarter, sales revenue was up 8%, driven by a strong 12% increase in sales volume, while our increase in reclamation volume again demonstrates our customers' strong commitment to refrigerant life cycle management and Hudson's Expanding Network for recovered refrigerant sources. These positive results were offset by the HFC refrigerant pricing and higher costs related to our investments, both of which impacted net income. Brian will provide more detail on our financial results in a moment. Turning to our business with the DLA, orders during the second quarter were in line with our annual run rate for the DLA contract. The five-year annual contract that was awarded to us and then rescinded due to a competitor's challenge is still in review. During the quarter, we were awarded a bridge contract, which keeps the current contract terms and conditions intact for four months through November 29, 2026, with two additional three-month extensions through May of 2027. We are very confident this open matter will be resolved shortly. Next, we often get questions about Hudson's activity in the rapidly expanding data center market. Most of what we read and hear about data centers today is focused on the immediate build opportunity for direct and indirect cooling and the role traditional HVA systems play. These are generally first fill opportunities for new systems dominated by virgin refrigerants sold to OEMs or through OEM channels. Hudson's business is centered on specialized high-speed recovery and legacy reclaimed refrigerant supply to the aftermarket. Today we have a nascent business with data centers, which is not a meaningful portion of our business today, but we expect this segment to be a much larger opportunity in three to five years as data center HVAC systems begin to need optimization, resupply, or decommissioning. We will continue to look for ways to optimize our presence in the data center market. This expected future demand is yet another reason for investment today in operational readiness. First, as I noted earlier, recovered refrigerants are an important feedstock for operations. During the quarter, we saw continued growth in recovered refrigerant volume as we leveraged our past investments in acquisitions that expanded our recovery ability, and more recently, the successful pilot of aftermarket small recovery trucks, or SRTs, in the New York City area that further facilitates our lifecycle refrigerant management program by focusing on high density, lower volume recoveries than our legacy service operations did not address. The solution is high speed, EPA compliant, and allows our contractor partners to focus on other value-added revenue-generating activities. By focusing on the contractor, we are not only expanding our access to recovered refrigerant, but also helping to increase overall industry recovery rates by simplifying the recovery and reward transaction so it is as effortless as possible while still complying with EPA reporting requirements. Second, when we receive recovered refrigerant from contractors for reclamation, the cylinders can contain one refrigerant or maybe mix with multiple refrigerants. Hudson has two of the seven reclamation facilities in this country that can separate mixed refrigerants from a cylinder using fractional distillation. This enables the conversion of recovered refrigerant feedstock into saleable products with greater efficiency compared to simple distillation or other methods. While fractional distillation is not new, the proprietary way we accomplish this separation is one of Hudson's core competencies. We're building on that expertise, and during the quarter, we announced our incentive partner with Icorium, an NSF Innovation Corp. startup company based in Lawrence, Kansas. To scale their patented extractive distillation technology to increase our ability to separate complicated next-generation azeotropes and HFO refrigerant blends in one of the most efficient ways possible. Thank you for joining us. and before expected increase in that data center related demands. As announced previously, our facility in Illinois experienced extensive damage from a tornado on June 11th causing us to temporarily idle operations while the plant was secured. The good news is that the damage is mostly related to the building structure and no one was injured with the storm removing the roof and the equipment attached to it and water damage to the interior of the facility. While the plant was without power for approximately one week, there was no detectable damage to the separation columns or to our product inventory. The facility was completely out of service for approximately three weeks with no loss of inventory and is now fully functioning while major repairs are underway. Expenses related to the full restoration will be covered by insurance and are not reflected in our second quarter P&L. Now I'll turn the call over to Brian. Please go ahead, Brian.

Thank you, Ken, and good evening, everybody. I will now review our second quarter of 2026 financial results with a comparison to the second quarter of 2025. Hudson reported $78.3 million in revenue, an increase of 8%. We posted a strong 12% growth in sales volume, which was partially offset by a 6% decline in average refrigerant sales price. During the 2025 quarter, essentially all refrigerant market prices rose as a result of supply chain constraints amid the EPA-mandated transition to HFO refrigerants. Gross margin was 26% compared to 31% in the 2025 quarter. The drivers to the gross margin decline were twofold. First, as previously noted, HFO supply chain constraints caused a temporary positive impact on all refrigerant pricing in the 2025 quarter. This pricing comparison rate is older than a 232 basis point reduction in gross margin for the 2026 quarter. Second, we experienced higher operating expenses primarily due to increased fuel costs in the quarter related to the conflict in the Middle East and the corresponding impact to freight costs. SG&A expenses were $12.4 million in the 2026 quarter, an increase of $3.1 million. The drivers to the increased SG&A costs were also twofold. We incurred costs related to the optimization of the recently launched ERP system, as well as legal expenses incurred related to the re-award of our DLA contract. Second, we increased staffing and consulting resources that reflect our newly reinvigorated focus on longer-term initiatives to increase shareholder value, as Ken noted. Net interest was flat in the 2026 quarter compared to net interest income of $700,000 last year, reflecting a lower cash balance on our unlevered balance sheet. Hudson recorded net income of $4.9 million, or 12 cents per diluted share, compared to net income of $10.2 million, or 23 cents per diluted share, in the 2025 quarter. The decline in net income reflects the combination of a continued drop in HFC refrigerant market pricing, inflationary pressures, primarily in freight, our ERP optimization, as well as legal and consulting support to continue our reinvigorated commitment to investing in the future for long-term shareholder value creation. The company continues to have an unlevered balance sheet ending the quarter with $26 million in cash and no debt, reflecting a sequential $6 million increase in cash versus our cash position at March 31, 2026. Thank you for joining us today. At this time, with the drop in refrigerant market pricing and inflationary pressure expected to continue, we are revising our full-year 2026 gross margin target from mid-20% to low to mid-20%. In addition, as we continue to invest resources for long-term shareholder value creation, we expect second-half SG&A expenses to continue to show increases over 2025, but to a lesser extent than the first half. I will now turn the call back over to Ken.

Thank you, Brian. We can't avoid the reality of soft market crisis for HSCs and the impact it has on our profitability, but despite this headwind, we had a very strong quarter focusing on meeting the growing service and refrigerant needs of our customers. The industry will continue to pursue the development and use of new, lower GWP refrigerants, and we believe Hudson has the expertise, facilities, and distribution network to bridge the transition now and in the future. To secure our vision, we are making the incremental investments needed to make Hudson a more flexible, efficient competitor and ultimately the preferred source for diverse refrigerant lifecycle management solutions. Thank you for your attention. Operator, we'll now open the call to questions.

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Once again, please press star 1 if you have a question or a comment. First question comes from Jason Tilchen with Canaccord Genuity. Please proceed.

Good afternoon. Thanks for taking my questions. Maybe one for Ken to start. Just wondering if you could maybe share an update on how the ERP implementation progressed during the quarter, maybe what are some of the early learnings as you continue to roll that out, and related to that, what may be the specific magnitude of the cost, those expenses for the optimization that were incurred during Q2, when those may start to roll off as well. Thanks.

Hi, Jason. Thanks for the question. Yeah, the ERP system optimization, I think, has gone better in the second quarter. It's definitely been a process. And I think that the cost, the magnitude of the cost, yeah, we spent a lot to optimize and get things sorted out. But we're seeing that cost is going to be reduced in the second half. It's not going to continue at the same rate. So there's over, you know, a million dollars in the first half that we've invested in ERP. optimization, and it'll be lower in the second half.

Great. Thank you. And in the prepared remarks, you mentioned that the dynamic you saw with pricing in the quarter didn't necessarily match the sort of typical dynamic you would see in an inflationary economy. You mentioned some of those potential causes of the softness of pricing. Just wondering what you think is needed in order to maybe drive more of a normalization in that behavior and any other sort of thoughts that you have on the operating environment would be helpful. Thanks.

It's definitely not a typical increase that we would have seen or a typical firming that we would have seen going into the season on HFCs. What it's telling us is that there, I think, in my opinion, there's excess channel inventory on HFCs that are keeping prices suppressed. I also think, and this is sort of new information, that there is more of an impact on illegal refrigerants coming in than we might have expected previously. So that's also having a dampening effect. What will impact the rest of the season is going to be prolonged heat, and I think we are seeing some of that. I think it would also help if some of the inflationary pressures were reduced, but I'm not really forecasting that. I think that's going to stay the same for the rest of the year.

Okay, great. And then last quick one for me is maybe one for Brian. Could you provide a little bit more color on the specifics around some of the areas from an operating perspective where you're seeing those inflationary pressures and to the magnitude that you expect them to persist in the second half?

Yeah, so it's across several different areas, but primarily in freight. So freight is where we saw the biggest increase. and unfortunately, in this dynamic, we can typically, in the past, you can always pass along freight in the pricing, but with this trough and HFC pricing, that didn't happen, so with that increase in freight, that was certainly a contributor to the margin decline.

Thanks very much.

The next question comes from Jerry Sweeney with Roth Capital. Please proceed.

Hey, Brian, thanks for taking my call.

and Jared.

I had a question about the distillation technology. Obviously it sounds like it potentially helps you separate mixed gas or dirty gas and gas comes back in all shapes, forms and fashions. That's related to the quality. Do you have any idea of how much more gases could potentially open up for you for reclaim? Because my understanding was some of the mixed gas, it was Thank you very much.

are components that we are unable to do effectively with fractional distillation that we will be able to effectively do tomorrow with extractive. That's a key unlock for us, and we'll be able to share more detail about what that is and what the volume is going forward, but that is absolutely a critical component for us. The second part of the story is this also unlocks our ability to move potentially into adjacencies that we would not have been able to access otherwise with fractional distillation.

What would be some of those ?

Yeah, I'm not going to get into it, but in broad strokes, right, this is a much more sensitive type of separation, so it gets us to a higher purity level, and it's a more sensitive type of distillation, so that puts us into a space where higher purity materials for other market segments in other areas That's where this is going to come into play.

And this may be too early to ask, but the economics behind it, the cost, is it as efficient as the current system, or how should we think about it from that perspective?

I don't think it's – I'm sorry. Go ahead, Jerry.

Oh, I wasn't sure if there would be an advantage. It would provide a more of an advantage on a cost basis, I think.

I think it is early to say, but right now we're estimating that it's going to be mostly useful for those complicated, highly contaminated lens. But as we get to scale down the road, then it should be a cost equivalent basis as fractional.

Got it. Okay. I appreciate it. I'll follow up with you offline as well. Thanks.

Yep. Thanks, Eric. Once again, if you have a question or a comment, please indicate so by pressing star 1 on your touch-tone phone. The next question comes from Josh Nichols with B. Reilly Securities. Please proceed.

Hi, this is Matthew for Josh. Thanks for taking my questions. So in terms of pricing, you're running down about like 6% against last year's peak. I'm wondering, as those funds ease through the back half, do you see current price levels holding and would you call the trend stabilizing or still under pressure?

we would see them stabilizing. So there was just a small uptick in 410A and Q2 versus Q1, very small, and we think it's stabilizing. Just call it in the $6 area. $6 per penny.

Got it. Got it, got it. And how much of a factor is the illegal import pressure on pricing? Like do you expect that to ease with enforcement? How persistent is that? And if you could quantify that a little bit in terms of the impact.

It's hard to quantify, as you might expect, but I think it's a bigger factor than we would have thought at the beginning of the year, but we are working with industry partners and our consortia of interested parties here to understand what the magnitude is, but it is in the millions of pounds is what I've come to understand, so this is a significant issue for the industry, and it is being addressed. What's going to be the second half outlook? I'm optimistic, but I can't say with any certainty that You know, this is going to be settled by the end of the year.

Got it. That was helpful. I guess the last question for me is just more on the aquarium technology. Just wondering what it does for your yield in terms of how much more recovered product you can convert to scalable versus conventional fractional distillation.

Yeah, and I'll say this. I think it's... a very exciting technology, but it is a commercialization, so we are taking something. We've done a lot of work on this over the past couple of years. I think that there's a huge opportunity here to separate out, as I said earlier, a component that we've not yet been able to separate effectively with fractional distillation, and we can do that with extractive. That's been demonstrated. So that alone is going to justify the investment, and then the improvement in yield on regular distillation Let's say regular cross gases. That's yet to be determined. But, you know, we are expecting this to be quite significant.

Got it. That was all for me. Thanks for taking my questions. Thank you.

Thank you. The next question is coming from Ryan Sickdahl with Craig Hallam. Please proceed.

Hey, good afternoon, guys. I will be the first to congratulate you guys on getting the five-year, $210 million Defense Logistics Agency. It hit just now. So congratulations. My question is, so you mentioned increased staffing as you focus on some of these longer-term initiatives. You've talked about service in the past, et cetera, but I guess you mentioned My inclination is you must be feeling pretty good about the pipeline of opportunities given you're bringing on fixed costs ahead of that. But can you give us an update kind of what you're working on, your confidence level, and any other details there?

Yeah, absolutely. And thanks, Ryan. I appreciate the notice. For everyone's benefit, what came across the wire as we were speaking is the DLA re-award has been re-awarded. So that is now behind us. It's been a seven-month stretch, and we're very pleased that DLA has recognized and validated our commitment to their success. So, thanks, Ryan. Yeah, when it comes to the investment, right, there's two or three major pillars here, and I'm going to include the extractive distillation in this because they're all linked together. But our predictive modeling business, and that's a nascent service area, has actually done quite well. We have four We have won four contracts this year so far for predictive servicing on multiple chillers. We're focusing that activity, and to support that activity, we need to have improved skill sets and new skill sets in the organization, so that's what we're really focusing on is the predictive modeling services as well as the small truck recovery program where we've added staff and we're adding locations to support that. That's already revenue positive, and we are excited by the pilot work that's been done in the New York City area, and we're going to continue that in other areas of the country, other major metropolitan areas with the rollout continuing for the rest of the year. So those are the areas where we're supporting staffing as well as regular services business. We're at capacity with our services group. We have done some data center work with our regular services group. this year, and that's very exciting. I don't talk too much about it, but it's a great growth area for us as that goes forward. And as I mentioned in my comments, we're going to need the service team to support it. So those are the areas that we've been investing in.

And I'll even add to that, you know, we have competitors on the line, so we're investing with consultants and such for things that we can't speak to now, but that we feel will have very good impact on shareholder value in the future. So one day in the near future... We'll be looking forward to speaking to those.

Good teaser for your competitors on the line, Brian, to look out behind their back. Maybe just one other one. You guys have done a nice job of outperforming, growing volume. I can't help but, given the decrement to gross margin, are you guys emphasizing volume over price and margin? And are you able to do that in the market if you want to do it?

Yeah, that's a good question. So we are balancing this. So we actually pulled back volume when the market prices started to erode further back in June. We made a strategic decision to start focusing on higher margin product mix. So we did give up some revenue on top line just to look at higher margin product sales. So we do have that ability, but it is a balancing act. And it was impaired somewhat in June by the plant being down. Some of our R22 sales could not be executed in June as a result of the plant being down. So those either got pushed into this quarter or didn't happen at all. So it is a balancing act, but we are able to fine-tune that as we go forward.

Thanks, Ken, Brian. Good luck, guys.

Thanks.

Thanks.

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

Okay, thank you, operator. And thank you, everyone, for your interest in Hudson Technologies, particularly this quarter. I want to thank, again, our employees for their continued support and dedication to our business, and both our long-term shareholders and those that recently joined us for their support during an exciting period of the company's evolution. This is a tough quarter. We had a lot of headwinds with the plant and accident, but again, our employees pulled us through, and I am extremely proud of the work that's been done to grow sales, grow volume in that environment. So thank you, everyone. We look forward to speaking to you after the third quarter results. Have a good night.

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