Greetings, and welcome to the Hudson Technologies First Quarter 2018 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, John Nesbett of IMS. Please go ahead, John.

Good evening. And welcome to our conference call to discuss Hudson Technologies financial results for the 2018 first quarter. On the call today we have, Kevin Zugibe, Chairman and Chief Executive Officer and Brian Coleman, President and Chief Operating Officer of Hudson. 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 business as we see them today, they're not guarantees of future performance. These statements involve a number of risks and assumptions, and since those elements can change, we would ask that you interpret them in that light. We urge you to review Hudson's Form 10-K and other SEC filings for a discussion of the principal risks and uncertainties that affect our performance, and other factors that could cause our actual results to differ materially. With that, I'll now turn the call over to Kevin. Go ahead, Kevin.

Good evening. And thank you for joining us. Our 2018 selling season is certainly off to a slow start, which resulted in first quarter performance significantly below our expectations. As we discussed on our fourth quarter earnings call about two months ago, selling season began sluggishly with just-in-time buying pattern rather than preseason stocking activity we typically see. Additionally, during the quarter we saw declines in both price and volume for most of the refrigerants we sell. The just-in-time buying approach coupled with cooler than normal weather and price declines contributed to our weak revenues and gross margin performance for the first quarter. We've been in this business a long time, and while we’ve previously seen price and/or volume declines in one refrigerant or another during certain time periods, the start of this year season has been challenging. Many in our industry has been hesitant to stock inventory, because last season they saw increased pricing early in the season followed by declines later in the season for all refrigerants, resulting in lower than normal margins for our customers. Additionally, the prolonged cold weather provided no stimulus for buyers because until the actual customer turns on their system, there is limited urgency and the demand for service or refrigerants. Only recently have we begun to see warmer more seasonable temperatures in the north and northeast, and as you would expect demand has improved. While we believe the demand will increase with the warmer weather, we are concerned with the overall pricing dynamics, particularly in the near term. To provide more specific detail, since we last spoke to you in early March, R-22 pricing has declined roughly 20% to approximately $11 to $12 per pound today. Conversely, HFC pricing started increasing late in 2017 and continued to increase through February 2018, because…

Thank you, Kevin. For the first quarter ended March 31, 2018, Hudson recorded revenues of $42.4 million, a 9% increase compared to $38.8 million in the comparable 2017 period. The increase is primarily related to the acquisition of ASPEN Refrigerants. Excluding ASPEN, revenues in the first quarter of 2018 decreased $17.5 million compared to the first quarter of 2017, primarily due to a decrease in both price and volume of refrigerants sold. GAAP gross profit for the quarter was $7.9 million or 19% of sales compared to $12.5 million or 32% in the first quarter of 2017. GAAP net loss for the first three months of 2018 was $3.1 million, or a loss of $0.07 per basic and diluted share compared to GAAP net income of $5.7 million or $0.14 per basic and $0.13 per diluted share in the first three months of 2017. We also provide non-GAAP information, which adds back various items, including for non-cash amortization of inventory step-up, acquisition expenses and stock-based compensation. A detailed reconciliation of these items is presented in today's release. On an adjusted non-GAAP basis, gross profit for the quarter was $9 million or 21% of sales. Non-GAAP adjusted net loss for the first quarter was $1 million or a loss of $0.02 per diluted share compared to non-GAAP adjusted net income of $6.1 million or $0.14 per diluted share for the first quarter of 2017. Adjusted EBITDA was $2.9 million for the quarter ended March 31, 2018 as compared to adjusted EBITDA of $10.5 million for prior year quarter. Our balance sheet remains strong with working capital of $111 million. Inventory at March 31st was $171 million. As Kevin mentioned earlier, since our 2018 selling season is off to a slow start, we didn’t see as much inventory move during the quarter as we would have expected. We do anticipate that as we move through the 2018 and the 2019 year, we will begin to see more meaningful declines in overall inventory balances of approximately $10 million annually. And then in 2019, we should see an increase in inventory turns as we begin to rely on a greater percentage of reclaimed products of R-22 for sale to serve the R-22 demand. From a cash flow perspective, in 2018, our non-cash charges, net of capital expenditures and taxes, should provide at least an $8 million increase in cash flow compared with our GAAP results. In addition to the inventory de-levering, we should see at least an additional $9 million in cash flow from a one-time tax benefit from changes in the tax law. As of March 31, 2018, we have approximately $57 million availability in our revolving credit facility with PNC. I’ll now turn the call back over to Kevin.

While we have had a disappointing start to the 2018 selling season, our management team is focused on using our combined industry experience and expertise to steer the company through this challenging time. With our acquisition of ASPEN, we are now a much larger business, and this scale has benefited us by providing a larger and more diverse customer base, increased reclamation capacity, additional bench strength to our management team and an enhanced base of experienced sales and operational employees. We are optimistic about the long-term market opportunity and believe we are well-positioned to grow our leadership role in the refrigerant reclamation industry. On a personal and sad note, Chuck Harkins, our Vice President, Sales and Marketing for over 20 years, due to health reasons will be leaving Hudson as of this Friday, May 11th. Chuck has been with the company since 1995. He’s played a large part in the growth of Hudson. And I know I speak for all of us here at Hudson when I thank him for his many years of dedicated service and for his contributions to our growth and success. Chuck has built a strong Hudson sales team where we’ve also acquired an equally strong team with the ASPEN group, which has allowed us to internally reallocate Chuck’s responsibilities. Most importantly, our thoughts and prayers are with Chuck and his family as he focuses on his health. Operator, we’ll now open the call to questions.

Thank you. We’ll now be conducting a question-and-answer session [Operator Instructions]. Our first question today is coming from Ryan Merkel from William Blair. Your line is now live.

So first question from me. Kevin, how did that happen to get R-22 prices back into the low 20s, and if the answer is, you need the supply to get cut. I guess I wonder with that only 1.5 year away here going to zero, why wouldn't we see supply demand at least pushing up prices a little bit here? I guess, it's concerning that we’re at $13, and we’re not just seeing a little bit more lift as we get closer to 2020.

We think the demand is going to come with the warm weather, for one. And as of last week, feeling some weather across the country, we clearly saw we have increase in demand. Price in the past anyhow we’ve seen a retraction, which you’ve seen a couple of them and the most recently, a bigger one was in 2013 by the next year went right past to being started going flat again, we said in '14 it came past it again. So once whatever it was that backed it off this time there were a couple of reasons why it backed, and that was we talked about in the first quarter last year of the producer putting the gas and then the cool spring that’s what started down that path and then people got burnt, as far as distributors did. So again, we have to rebound all of that demand and we’ll correct things. Once demand is going again and volumes move then the market starts acting like the market again and then just price increases, we feel confident of that.

And maybe one other things to add, much like what happened in ’14 and the prior year in ’13, there was a jump in the substitute products. At that time, we saw about an increase to 20% market share in '13. The same pattern also happened last year with the jump in the substitute. So far this year, we don't see any real demand for substitutes. Our belief will be that there will not be much increase or any increase in substitute demand, and it should retract to single-digits as we've seen before.

So it sounds like a perfect storm of the bad weather and then people getting burned last year, so they’re not buying now. But it’s transitory and you still think that R-22 prices are going to rise with demand, and as we get closer to the production going to zero. Is that fair?

Yes, and again on this year, the HFC was a different reason and more with the Chinese imports and the pricing from that. So we got hit with a couple of different things. So we did have the perfect storm.

And then on the revenue guidance of $230 million, I think it's fair to extrapolate the pricing that you're seeing today, maybe that’s a bit conservative. But I guess my question is now that we are seeing better demand. Wouldn’t the price start to pick up here and are you seeing that?

It depends. Again, we don’t get ahead of it that way on the price. In '14 when we saw this happen and seen the lay level the whole year. So even though demand started to pick-up at levels and just started coming up in the following year, so it's just hard. Could it this year? It could, hoping it does. We don’t want to get ahead of things, and think it’s going to though.

And then just lastly, I'll pass it on. Can you give us a free cash flow target for 2018?

We should be at least at about $30 million total, that's coming from both operations and from the de-levering on the balance sheet.

Thank you. Our next question is coming from Gerry Sweeney from Roth Capital. Your line is now live.

On that guidance of $230 million. Is that implying R-22 at $11 to $12 or is that different?

It should be in that range of $11 to $12. I mean, the $11 number right now is less frequent. We put the $11 in there, because we've seen a little bit of it. But it should be in that kind of range. So back to our revenue reduction and guidance is 100% coming from pricing.

And then just -- I haven’t had a real opportunity to dig through numbers. But I am surprised inventory only dropped on the balance sheet by, I think a little over $1 million in the first quarter. Is that a function of -- I mean, were you still acquiring some inventory at that point of the year or is there some nuances there that…

Yes, we definitely were acquiring -- I mean, back to let’s say expectations. Our expectations, obviously, was to sell a lot more volume in the first quarter as we normally would have. Now ASPEN normally sells less in the first quarter than we do as a percentage, but in either case we expect to sell more volume. As we said on the call in early March, we were anticipating having the ability or frankly needing to have the inventory, because we thought once the demand came, we would attempt to catch up our overall revenue targets. Now, what’s affecting us meeting those revenue targets is maybe a pricing dynamic. But we still think the demand should be fairly reasonable similar to other years, and things like that. So we need to have the inventory to meet that demand for the second and third quarter.

And then on the expense side. Is there any way to -- I mean any levers -- obviously, I mean you’ve got some levers on the working capital side. What about on the expense side? Is there -- can you bring in some of the expenses for the rest of the year and manage that a little bit to maybe drive some profitability, or are you just -- you don’t think we’re there yet and you need that…

In terms of the expenses, we try to be reasonable with any growth rates, first-off. Secondly, we’re now getting into the final stages of the transition. So that we’re on the last leg of IT, let’s say support, coming from Airgas within the overall transition services agreement. I think we’ve communicated with everyone on the phone before that we expected this to be completed in this quarter, as we speak. So once that last leg is put together and we’re working off of one accounting system and the like, and we were engaging additional integration work, there may be some additional synergies and things like that. But we've also said that synergies was not the primary target for the acquisition, but that synergy typically do come. So we would expect some of that.

Thank you. Our next question is coming from Steve Dyer from Craig-Hallum. Your line is now live.

With respect to the $20 million of haircut you gave for revenue guidance. Given that you’re about half way through the second quarter. Would you anticipate the bulk of that happens in Q2, or are you thinking more ratably over the cooling season?

Probably Q3 is going to be stronger now based on what’s happened so far. If this year continues to be like hand-to-mouth then historically our Q3 would generally not be a strong quarter, because people would be thinking about beginning to destock and put cooling equipment in -- or heating equipment, let’s say, in September or whatever possibly now. That means they’re going to have to continue to buy refrigerants, July, August and into September maybe even, which we would not normally see. So it's probable that our third quarter will end up being stronger as a result of all this. But this change in weather last week has definitely helped with pick-up in demand.

So the bulk of the $20 million I guess short-fall if you will versus your original guidance, most of that or a lot of that's going to be reflected in Q2, would you say?

Well, a lot of it comes from Q1 and then certainly some of it comes into Q2, yes.

And then if you could just maybe refresh our memory around the debt covenants and the terms. And I know it's 4.75 to 1 and in trailing EBITDA, but I don’t have the combined company EBITDA in Q3. So I mean, I think based on the assumptions around margins and revenue, that's going to push your EBITDA probably somewhere in the low to mid-20s. I guess, I don’t know the cadence of your free cash flow, how you’re thinking about throughout the year. But any commentary you could provide around your comfort level around the covenants, and ability to work around those? Thanks.

So I think we’ve shared with everyone that our intensive to take the free cash and just lower our debt, and we’ve demonstrated that. For example, at the end of last year, we lowered our debt from excess cash flow. So that's our number one goal, no matte of what, continue to lower our overall debt. In terms of our covenant, we try to set our covenant at 4.75 to give us cushion for any particular anomalies. We’re now just over 4%, or 4 times on the leverage. So we are certainly getting closer to that. Our intent is to operate the business so that we don’t have the covenant violation. We had covenant violations in the past 2013 and 2009. We spoke with our lenders at that time when we have them, mainly with market conditions and price declines that are temporary as we've seen in these past quarters here. So to the extent that whenever the circumstances maybe, we expect to work with our lenders and so forth. But as of right now, the leverage ratio is about little over 4.

And then just lastly, the tax refund. Have you received that since the end of the quarter, or what's the timing around that?

We seen -- collected at lease about two thirds of the total, there will be probably another collection in the early third quarter. Although, this year sometime. Probably not in the second quarter, but it will be probably in the early third quarter.

Thank you. Our next question today is coming from Sarkis Sherbetchyan from B. Riley FBR. Your line is now live.

So just question really surrounding reclamation expectations for this season, obviously, with the pricing where it is given today's environment. How do you influence behavior to go more towards reclaimed gas instead of, let’s say, more virgin or from the current inventory levels?

Well, certainly. Again, we've always said economic should help encourage your behavioral changes. And when the prices are lower, our economics to the contractors are in fact lower. Based on the EPA report, we now know that for the 2017 year, as we go up we might, we do represent 35% of the overall reclamation market, and that's also true for R-22. Back to our plans and part of the reason for the acquisition of ASPEN, because ASPEN does work further downstream than we have historically. We do still feel that they're closer to the sources of where the potential gas could be recovered. They would be aware of, for example, entities, system owners, that are converting from 22 to a new HFC product, for example, and being in a position to historically supply that HFC product. Now, we’re working with their sales teams, including actually buying groups to -- think more about the buying side, as well as the selling side. So we think while the economics are not in our favor at the moment with lower prices, we think the sales strategy that ASPEN has can lead to additional reclaim if properly invested and nurtured the relationship on the buy side.

And then if I just look through the non-recurring expense. I think it was almost $1 million for this quarter. Can help us understand what that breakout was, maybe what components it relates to? And then if you expect to have some of those, going forward?

I think what you're seeing now is dwindling on a relative basis quarter-over-quarter. Most of this, it’s just a hair under a million dollars. It’s in the whole support function for the IT exercise that we’re going through. As I said, we’re going to be completing that in this second quarter. It’s likely that the total cost in the second quarter are going to be lower than the first quarter. Although, they may not be materially lower. But certainly, by the third quarter, there should be some residual very nominal dollars we think spent in this area. And certainly by the fourth quarter, they should be almost zero.

And just one more, if I may. Can you help us understand how the DLA contract is progressing and/or how the revenue services side is progressing, especially into this selling season?

So as we’ve said the fourth quarter, DLA was roughly $3.8 million. And we think we’re still on track for the year to do 15 plus possibly. It seems to be going well. Again, it’s different than our normal business. We have things to learn originally, but it's coming along smoother and smoother. And yes, we’re saying for this year, we should be doing 15 plus. For the services, in general, services is actually seeing good for different reasons and not necessarily because of heat. Sometimes you have good hit of good spike in temperature, systems fail and we’d be out for the largest systems. This came from different reasons, preplanned outages that for our service teams to be, our outside service teams to be very solid this year. It’s the one area that we’re actually happy with.

Thank you. Our next question today is coming from Matt Sherwood from Silver Creek Partners. Your line is now live.

So I guess there’s just been some concern just in light of some of the questions that were asked about covenants and the shelf filing that you’re looking to do, and equity raise to get your leverage ratio in line. Are there levers that you could pull -- first of all a covenant lever, but forgetting about that, are there levers you can pull with inventory? And do you thinking an equity raise would be a necessary piece of your strategy?

We haven't been thinking equity raise at all. We didn’t file a shelf for that reason it’s something we've done. This is fourth time we've done it. That was its first chance once the financials were prepared that we could have filed it. And so this was just putting in line. We always are looking for opportunities. You never know when they’re going to come. This standard has nothing to do at all with, hey we're going to raise capital at this point or we’re going to do an equity rates. So didn’t come from that end at all.

Then last one on the inventory. Do you have an opportunity that further reduce inventory? I know there is ability to put some inventory back to Airgas if need be, and you also have the ability to buy less virgin gas, should you desire to do that. How do you look at the opportunity there?

Again, so we’ll always be working to -- I'm not sure what you meant by selling back or putting back inventory to Airgas. I wasn’t quite following you on that question?

If there is no…

That’s why I'm asking maybe to repeat it. I’m just not sure what you meant by that…

I saw that in the purchase agreement, so that's fine. Do you have an ability to buy less virgin gas here to reduce inventory if you thought that was the right strategy to shore up your balance sheet further?

Absolutely. As we said earlier, our goal is to lower the overall dollars and inventory that comes from sales obviously and then to the extent that we don’t need to reload the volumes that we have. And that's what our expectation is, is that the overall dollars will decline, because the overall pounds in inventory will decline. And back to, let’s say, if we’re focused solely on R-22, we will no longer be in a position, frankly, to buy a lot of virgin R-22 anyway, because R-22 virgin supply is dwindling. Certainly, the annual allocations are significantly lower than what they were. Also, we do think a lot of the stockpile is gone. And we think that when we get through this year and have reasonable demand, there won't be much stockpile available for next year. So overall, we do expect lowering our inventory volumes and that that results in a reduction in dollars tight up in the inventory. And when you said the other line about the sales, you are talking about in the stock purchase agreement to sale on - it was actually at closing or just lower the purchase price. There was nothing at sale it was lowering our purchase price at closing. So you wouldn’t see it as a sale, and it was a onetime thing at the time when they took inventory. And that was what we arranged, just foreclosing and it's closing again all back, it was lower than purchase price.

And then last one I guess you talked about the stockpile being lower and some of the positive long-term dynamics in the industry. I guess, does this year's lower run rate of earnings change your outlook for your longer term earnings power in 2019 and 2020? And I guess, how should we look at longer term earnings power if we look through this challenging year?

Well again -- so you start with the stockpile. I don’t think anything has changed from our opinion. This was -- yes, we have lot of people shelves early but if demand is demand this year, meaning if the heat comes and we're selling throughout the whole nine-month season as far as the latter half of the nine month season, it’d be similar to volumes that we would have thought. So we don’t know of the stockpile, we don’t know that it's there actually, we just assume that one producer has some. So we think everything is exactly as what we talked about. So this was just a slower start to the year in our eyes.

And we’ve seen -- every season, its isolation and its nine month season. There’s nothing right now that’s happening today that we feel has any permanent impairment, or change in ‘19 and beyond. So any for example discussion about what we projected, we’ve guided, is a little bit focused -- a change to that, is a little bit focused on 2018. We haven’t discussed 2019 or beyond, because there’s nothing that tells us there’s a permanency in change in outlook with regards to what’s happening right now.

Thank you. Ladies and gentlemen, we’ve reached the end of our question-and-answer session. I’d like to turn the floor back over to management for any further or closing comments.

I’d like to thank all our employees, our long time shareholders and those who recently joined us for the continued support. Thanks everyone for participating in today’s call. And we look forward to speaking after the second quarter results. Thank you.