Good afternoon, ladies and gentlemen and welcome to the Hudson Technologies’ First Quarter 2022 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. It is now my pleasure to turn the floor over to your host, Jen Belodeau. Ma’am, the floor is yours.

Thank you. Good evening and welcome to our conference call to discuss Hudson Technologies’ financial results for first quarter 2022. On the call today are Brian Coleman, President and Chief Executive Officer and Nat Krishnamurti, CFO. I will 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 these 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 other factors that could cause our actual results to differ materially. With that out of the way, I will now turn the call over to Brian Coleman. Go ahead, Brian.

Thank you. Good evening and thank you for joining us. 2022 is off to a very strong start building on the momentum we saw coming out of calendar year 2021. We delivered record first quarter results as demonstrated by significant revenue growth, substantially enhanced margins and improved profitability. The first quarter kicks off our traditional 9-month selling season and we saw a continuation of the upward pricing trends that characterized pricing activities in the back half of calendar year 2021. You may remember that our 2021 season got off to a slow start and then picked up momentum as the year progressed. In addition to record revenue for the first quarter of 2022, gross margin increased to 54%, mainly due to significant increase in the average selling price without material appreciation and the cost basis of certain refrigerants. Simply put, selling prices for refrigerants increased faster than our cost of refrigerant in the quarter. Additionally, we benefited from increased sales volume as we continue to focus on developing strategic working relationships with customers who value not just our ability to meet their refrigerant needs today, but who also recognize the value of our sustainability portfolio. This growth was achieved while we continue to exit certain non-core sales, which is a pattern we started during the third quarter of last year and likely conclude this year. Over the years, we have established a solid base of longstanding customers and we remain focused on adding customers who understand Hudson’s value proposition as a supplier and a producer in the circular economy of refrigerants through reclamation. That said, our first quarter margin was unusually strong and not sustainable over the long-term. We expect margin performance for the full year 2022 will moderate to levels similar to last year as the cost of inventory…

Thank you, Brian. For the first quarter ended March 31, 2022, Hudson recorded revenues of $84.3 million, an increase of 149% compared to $33.8 million in the comparable 2021 period. The growth was driven by increased selling prices for certain refrigerants during the quarter as well as increased volume. Gross margin was 54% for the first quarter of 2022 compared to 27% in the first quarter of 2021. As Brian pointed out earlier, the gross margin increase is mainly due to the significant increase in selling price without a material appreciation and the cost basis of certain refrigerants sold. As we move through 2022, we expect gross margin performance for the full year to moderate to levels similar to gross margin performance in fiscal year 2021. SG&A for the first quarter of 2022 was $6.8 million or 8% of revenue compared to $6.7 million or 20% of revenue in the first quarter of 2021. We recorded operating income of $38.3 million in the first quarter of 2022 compared to operating income of $1.7 million in the first quarter of 2021. The company recorded net income of $29.6 million or $0.66 per basic and $0.63 per diluted share in the first quarter of 2022 compared to a net loss of $1.1 million or a loss of $0.02 per basic and diluted share in the same period of 2021. The company’s leverage ratio was 1.16x to 1x for the trailing 12 months ended March 31, 2022 declining significantly from a leverage ratio of 6.18x to 1x for the trailing 12 months ended March 31, 2021 mainly as a result of improved performance. During the quarter as previously announced, the company entered into a new $85 million term loan agreement with TCW Asset Management LLC and amended its existing revolving credit facility to…

Thank you, Nat. As we enter the heart of the 2022 selling season, we are excited about the opportunities ahead and focus on growing our leadership position in the refrigerant and reclamation industry. Operator, we will now open the call to questions.

Certainly. [Operator Instructions] Your first question is coming from Ryan Sigdahl from Craig-Hallum. Your line is live.

Good afternoon, Brian and Nat. Congrats on the strong results.

Well, thank you very much. Good evening.

Curious I don’t think I caught up well, what exactly is the price of R-22 and our R-410A currently?

Sure. R-22 is fairly stable in the low-30s. I am not certain that you are going to see much further price movement on R-22. We always have provided a long-term range target that R-22 ought to get to $30 a pound as we would have seen with many of the CFCs that were phased out back in the 90s. R-22 will be acting with much more normal economics relative to supply and demand and therefore pricing. So, we expect it to continue to be in that level and probably not materially change over time. We expect Hudson to continue to gather used R-22 at a significant lower price cost basis relative to that sale price and that model should continue. As it relates to HFCs we have seen again further price increases, since even our last earnings call. We are now certainly above $14 on average for HFCs. And we are now starting to see a break in HFC pricing that we may not have communicated clearly in the past. But we are starting to see higher than average prices for this $14 or higher for HFCs that are much higher GWP value than let’s say a 410-A. So we are trying to articulate here is if you happen to have an HFC that might have twice the GWP waiting of 410-A while it’s not true today, we do see situations where that particular refrigerant could sell for twice the price of our 410-A just because of the GWP waiting. So this is something we do expect to see more so possibly in 2024, but we are beginning to see a lot of signs already in this initial implementation in Q1 of the AIM Act that has accelerated what we thought we might see and as a result in our financial performance this first quarter.

And Brian, can you remind us what your breakout is approximately on HFCs between R410-A and those other gases?

Well, HFCs now are the dominant refrigerant in the marketplace. They are likely in that 75% to 80% of the total aftermarket volume within R-22 and other products, even to some extent HFOs are beginning to increase, very small percentages right now in the aftermarket. So really HFCs dominate the overall demand in the aftermarket.

But maybe breaking that down one more layer within that HFC 75% to 80%, what percent is R-410A, which historically had dealt with a vast majority of the volume versus those higher GWP HFCs that you are referring to?

Yes, that would be correct. So R-410A is the replacement refrigerant for R-22. It’s mainly a comfort cooling application. R-410A probably is the single largest volume HFC, but there are 20 plus HFCs out there in the marketplace of some material size. After 410A, then you are getting into the products like 134A. And then the rest of the HSC pack is pretty similar to each other.

Helpful. Moving on to inventory, so it increased pretty significantly. How much of that is adding pounds versus price increases within there as your cost base increases? And then secondly, on inventory, how do you feel about inventory levels heading into the summer selling season?

Yes. So, back to our inventories and discipline with our inventories, we are really seeing dollars in inventory and higher dollars in Q1 versus December, really coming from price. Our cost basis is increasing in the refrigerants we are selling. And that’s why we say that don’t expect this very high Q1, gross margin to continue for the remainder of the year. Q2 will be lower than where we are now. And certainly by the time we get to Q4, we would think our gross margins are going to be closer to our long-term forecast for now, which is at low-30%. So, that’s how the year should progress. It’s likely whenever you see dollars in inventory, it’s always going to be because of price increases, not because we have got more pounds in inventory. And we feel like we have done a very good job of managing our inventory relative to our customer demands, particularly in light of the experiences we had in the past where we might have carried more inventory than we needed to. And when we had some price volatility, we certainly as it went – prices went down, we are more negatively affected because of the volume. So, I think we have the inventory volume in the right place. And I think any further price increase or dollar increases you will see on the balance sheet were because the price of the inventory went up.

Helpful. Maybe to dig into that gross margin statement, so if you exit the year Q4, closer to 30%, or low 30%. And it’s just kind of worked its way lower throughout the year. Based on where Q1 came in, I mean that for the year, it implies something recently better than where 2021 was at 37%. Can you square and reconcile kind of the statement that you expect full year to be similar year-over-year and then what you just said kind of on the cadence?

Look, we just think that starting in Q2, you are going to see a retraction on the margin percentage. But on an overall basis, we thought the 2022 year gross margins might have been lower towards that 30, 31, 32 kind of number. Clearly, we think based on Q1, expecting a retraction on the margins throughout Q2, Q3, particularly Q4, we think we are going to be able to achieve something similar to that of last year.

Great. I will turn it over to the others. Thanks, Brian.

Thank you.

[Operator Instructions] Thank you, ladies and gentlemen. This concludes our Q&A session and conference call. Thank you for attending today’s presentation. You may now disconnect.

Sorry. I like – excuse me, thank you. I would like to thank our employees for their continued support and dedication to our business without the hard work of our employees we would not be able to achieve these results. And I want to thank again our long-term shareholders and those that recently joined us for their support. Thank you everyone for participating in this evening’s conference call and we look forward to speaking with you after the second quarter results. Have a good night everybody.