Good afternoon, ladies and gentlemen and welcome to today's Hudson Technologies Third Quarter 2022 Earnings Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, John Nesbett of IMS Investor Relations. John, the floor is yours.

Thank you, Tom. Good evening and welcome to our conference call to discuss Hudson Technologies' financial results for the third quarter 2022. On the call are Brian Coleman, President and Chief Executive Officer; and Nat Krishnamurti, Chief Financial Officer. 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 expectations about the future are forward-looking statements. Although they reflect our current expectations and are based on our best view of the industry and 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. Okay. With that, I will turn the call over to Brian Coleman. Go ahead, Brian.

Good evening and thank you for joining us. Our third quarter delivered a strong close to our 2022 selling season, reflected record revenues, improved margins and enhanced profitability. During the third quarter, we continue to benefit from sustained strength in the pricing of certain refrigerants. In addition to delivering our third quarter of record revenue performance, we achieve gross margins of 49% in the quarter and a significant improvement when compared to gross margin in the third quarter of 2021. However, as expected, gross margin moderated sequentially as compared to the first and second quarters of this year as we began to see less of a gap between the inventory cost and the sale price. As we enter the fourth quarter which is seasonally our weakest quarter, we are focused on maintaining our existing strategic relationships and adding new customers who share our vision of the circular economy of refrigerants. Hudson is a longtime industry leader in the facilitation and adoption of sustainable refrigerant management and we are delivering on the efforts to attract partners who are similarly committed. In addition to our traditional sales activities, we're also heightening the market recognition of sustainable products, services and consultation capabilities through our participation at industry events. In mid-September, we exhibited at The Food Industry Association's Energy and Store Development Conference which focused on retail food, energy use and management, HVAC and refrigeration and sustainability. In October, Hudson presented a continuing education webinar around the AIM Act phasedowns and the importance of reclamation which was sponsored by the industry news magazine, ACHR News. With almost 500 live attendees and we anticipate another several interviews from registered participants. This week, we're exhibiting at the Greenbuild International Conference and Expo, introducing our products to attendees focused on creating greener buildings and communities throughout the…

Thank you, Brian. For the third quarter ended September 30, 2022, Hudson recorded revenues of $89.5 million, an increase of 48% compared to revenues of $60.6 million in the comparable 2021 period. The growth was driven by increased selling prices for certain refrigerants during the quarter. Gross margin was 49% for the third quarter of 2022, compared to 39% in the third quarter of 2021. The gross margin increase is mainly due to the significant increase in selling price without a material appreciation in the cost basis of certain refrigerants sold. As expected, we saw a moderation in gross margin sequentially in the third quarter, compared to the second quarter of 2022 as the gap between inventory cost and sales price narrowed. SG&A for the third quarter of 2022 was $7.2 million or 8% of revenue compared to $6.1 million or 10% of revenues in the third quarter of 2021. We recorded operating income of $36.3 million in the third quarter of 2022, compared to operating income of $16.9 million in the third quarter of 2021. The company recorded net income of $29.4 million, or $0.65 per basic and $0.62 per diluted share in the third quarter of 2022, compared to net income of $15.9 million, or $0.36 per basic and $0.34 per diluted share in the same period of 2021. Net income during the third quarter of 2022 included a tax benefit of $2.8 million associated with the release of an income tax valuation allowance as a result of increased profitability. During the third quarter of 2022, the company paid down an incremental $31 million of term loan debt, resulting from improved performance and increased cash flow, thus reducing its leverage ratio to 0.41:1 for the trailing 12 months ended September 30, 2022, declining significantly from a leverage ratio of 2.35:1 for the trailing 12 months ended September 30, 2021. During the 9 months ended September 30, 2022, the company generated $60 million of cash flow from operations which was mainly used to pay down term loan debt that now includes higher interest rates. Throughout this time, we have not needed to borrow against our revolver loan which allows us even greater financial and operational flexibility. The company's availability consisting of cash and revolver availability at September 30, 2022, was $87 million. As we continue to generate additional cash flow into 2023, we expect to, one, further de-lever our balance sheet; two, ensure we have adequate inventory on hand; and three, consider other opportunities as they arise. We have strong liquidity and our term loan and revolving loan credit facilities provide us with a solid financial platform and flexibility as we look forward. I will now turn the call back over to Brian.

Thanks, Nat. Our 2022 selling season was very strong. And we are focused on using the offseason to prepare for what we believe will continue to be a very receptive market for our products and services. We look forward to continuing to drive the momentum we built and to growing our leadership position as a provider of sustainable products and services for the refrigerant and reclamation industry. Operator, we'll now open the call to questions.

[Operator Instructions] And the first question today is coming from Ryan Sigdahl from Craig-Hallum Group.

I want to start with pricing. So strong pricing, obviously, throughout this whole selling season, favorable dynamics. Curious what you’re seeing currently how the season ended? And maybe if that portends anything towards what you expect kind of the start next -- selling season next year?

Yes. We've seen a little decline in the sales price, particularly towards the latter part of the third quarter in some segments probably under 10%. And we attribute it to -- this our first year that folks with allowances whether their producers with consumption allowances or importers, probably were a little cautious with what product they were making available in the beginning of the year to make sure, let's say, they didn't run out. That's a way to look at it. And probably found that they were too cautious and had slightly more availability, I think on the back half of the year. So I don't think overall it affects our current view and long-term views about pricing. We do expect prices to increase over time. And so we think it was just more probably the first year of folks trying to allocate allowances and where to apply them and when.

And moving over to reclamation, have you seen any uptick in volume kind of once we get towards the tail end, it’s more reclamation timing. Have you seen any change in contractor behavior, willing and able to capture more gas returning dirty gas, et cetera, relative to past seasons?

Again, it's -- right now, it's surprisingly slow growth because we are paying more money now. As it relates to wholesaler activities, they still continue. Often, a large majority continue to charge the contractors. I think the relationship that we created this year with Lennox which then has probably over 3,000, dealers which are contractors, is the first big step for Hudson to go direct to the contractor to try and provide them with sufficient economics to obey the law and to increase the returns to refrigerants. So we're seeing some benefit from that Lennox relationship. But on an overall basis, we're still -- let's say, on overall basis disappointed with the rate by which reclamation is growing. Now, we participated in a white paper with 3 NGOs and another reclaimer and provided some guidance and recommendations for programs that the EPA could support to enhance the growth of reclamation. And we believe that some time probably by mid-next year, we should see a rule from the EPA around refrigerant management and programs to promote the growth of reclamation. Now, we think it's going to be a little late in terms of timing to help offset what we think is going to be severe availability in 2024 relative to the 40% reduction in HFC virgin allowances. So we're moving forward, I'd say, slowly towards our objectives. And we're seeing some, I'd say, small signs of positive movement.

One more for me. With California regulation change that you mentioned requiring part reclaimed gas and original equipment here starting in 2 months and ‘23. But how well prepared do you think OEMs are, how educated, prepared with the relationships, access to reclaimed gas, et cetera, do you think there?

It's difficult to answer that without being inside any of these organizations. They certainly are aware of the issues. Most would have participated in activities sponsored by a trade organization called AHRI and its negotiation with the state of California. The 2022 year provided an opportunity for early adoption but the regulation itself is not effective until next year. So how any of the OEMs are going to treat the requirements next year versus this year, it's difficult to say but I would say that it appears that there were very few early adopters.

And the next question is coming from Gerry Sweeney from ROTH Capital.

I wanted to stick on collections. Obviously, that’s a key focal point for the model. Is there any -- and obviously, you mentioned Lennox, a 3,000 deal or 3,000 potential contractors with them. Is there anything else that you can do to make even those 3,000 contractors, make it easier for them to get product to you? Is there a mail-back program that they can mail canisters? Obviously, there’s probably some rules and regs around that but I’m just curious if what your thinking is to ease -- make it easier for contractors, not just Lennox but even potentially others.

Yes. I mean, that's a very good question. We have spent recently a fair amount of time trying to get voice the customer, ask a lot of questions of contractors or pain points, including the trade organization, AHRI has put together some surveys in different places of the channel about what might be perceived barriers to recovery and reclamation. We are trying to not create any one program. What we are trying to do is listen to the contractors and try to help with whatever problems they may have. Do they have a loading dock, do they not? Do they palletize, do they not? Do they want to bulk up or not? So we're trying not to have one program or one offering. We have to date chosen not to go and create [indiscernible] contractors. There are some folks in our industry that have done that. And the reason we've chosen not to do that is we've never found that approach to the market to be economically viable. It's certainly marginal. And so what we're really trying to do is find ways to use LTL or other means to get to these contractors as to avoid building up an infrastructure of trucks and then driving around to pick up at local locations.

Got it. I may have an idea for you later actually offline. It’s just something -- yes, yes. There are people out there that do that stuff but got it. That’s helpful. And inventory, 2024 big step-down, how much inventory -- I mean, how do you look at inventory, not just this year or next year but really, we have, what, 14, 15, 16 months before 2024 hits -- really hits the selling season. Is this the time to bulk up on inventory? Have you made any decisions or thoughts on that front?

So sorry, Gerry, are you asking Hudson's view on Hudson's carrying volumes?

Yes. That’s correct.

So we certainly were hurt when we did the Airgas acquisition with a multiyear stockpile of product and a price correction. And prior to 2017, we generally saw wholesalers stocking inventory in Q1 and then reloading in Q2 and then not buying a whole lot towards the end of the season in Q3. And also simultaneously around the time of the acquisition, we saw the purchasing pattern change by those wholesalers. And to date, we don't see a lot of wholesalers buying large volumes in Q1. They certainly buy in Q1 but not to the extent that they might have in the past. And we certainly see them buying more in Q2 and now Q3. So we made a decision. I'm not sure when we started to affect that decision. But let's say, in 2019, sometime in 2019, going forward that we weren't going to carry as much inventory volumes and we're sticking to that plan. We certainly don't know what next year's economy could bring. As you know, the thing that we really care about most as a headwind is cool weather. You don't know if you'll have a cool spring. So we just always are trying to be a little bit cautious with the amount of inventory we carry. Now the dollars have been increasing in inventory mainly because cost per unit has gone up, not so much the overall volume of product.

That’s fair. And listen, I mean, on that front, right, let’s go around R-22 [ph] had been phased out. HFCs were taking with a new game in town and were well-established and there were alternatives and -- which brings me the next question. I don’t know of any alternatives. And I’m just curious if anything has popped up. I don’t think there’s actually a way to create an alternative for the HFCs but I’m just curious if you had any input on that.

So I think we've covered there are several different pieces to this AIM Act and why the AIM Act and HFC reductions really do not look anything like the prior phase-outs. And probably one of the important pieces to this is what you just were touching on that at the end of the day, there's a CO2 equivalent phasedown of HFC production, not a product-by-product phase-down or phase-out. And so what we think will happen is people and OEMs over time and we're still waiting for a lot of building codes to change to allow this to happen are good manufacture, lower GWP refrigerants. If you take like a 410A, it has a little over 2001 CO2 equivalent. It's the most widely used HFC today but using allowances to produce 410A is not sustainable when you have these severe cuts. And so people will be converting to lower GWP products. We haven't seen any lower GWP products that might constitute a drop in. So we haven't seen any technology per se that you could argue would help run a 410A unit with some other HFO replacement or whatever category you talk about. We're really talking about well over maybe 100 million to 120 million stationary units that over the next 5 to 15 to 20 years are going to have to likely convert to something new. Now technology can change. I don't know what 15 years from now will bring. But right now, we don't see, let's say, the same view or approach to drop-ins, as you saw with ODS systems that were allowed to be replaced or converted with HFC systems. So sorry for the long answer.

Yes. No, no, that’s -- I think it’s helpful for everybody. And the key there, part of it is an HFO system has different -- has a different flammability which need building codes to change before a potential -- a drop in for an HFC system will require some HFOs which is more -- potentially more flammable which also requires building codes. So there’s several steps that have to happen for a potential drop in to occur.

Yes. And the building codes will catch up -- probably 2024, '25. And then also not all HFOs but some amount of the HFOs use HFCs as components. So again, this will be another decision that a producer with consumption allowances will have to decide, are they really going to make HFCs for sale into the aftermarket? Or are they going to make HFCs that will go into HFOs? And then is it plausible that they might want to work with a reclaimer, get more HFCs to grow that HFO business.

That’s it. I’ll jump back in line. I asked enough and took up enough time.

Your next question is coming from Chip Moore at EF Hutton.

Hello. Brian and Nat, thanks for taking the question. One as -- another one on collections, reclaimed rates still being a little disappointing, like you said. Curious how you’re thinking about the outlook for growth there, supply growth mix for next year’s selling season. Do you think we need to see that EPA rule to get a real pickup? Or how should we be thinking about that for next year selling season?

So most of the reclaim that we receive, let's say, this year will be utilized next year. So growth in reclaim activities in the 2023 season in some respects will benefit 2024 because most of the used gas that you bring income in the back half of the year around this time of the year, for example, more so than the first 4 months of the year. And as it relates to the opportunity, first off, if you take HFC 410A, right now, the reclaim volumes of HFC 410A are only about 25% of what the peak reclaim volumes were for R-22. So if you just say that somehow which we don't believe but somehow the AIM Act and the implementation of the phase-out is similar to ODS, then you have at least a fourfold growth in the opportunity of HFC reclaim from where we are today. But then we do believe there's added elements to allow for reclamation to grow much more significantly that. One is, as I briefly mentioned, we participated in white papers and have put forth some ideas for the EPA to create programs to promote the growth of reclamation. And in fact, there will be a rule-making likely the middle of next year that will address this. So that will be the first time. And certainly, there was no promulgation of regulations by the EPA with the prior phase-outs to support the growth in reclamation. And the third piece that's maybe the most important piece is the commercial side. We really do believe OEMs are going to back and support recovery and reuse. We think they have to, in some respect, to meet their obligations. And we do think chemical producers will also likely participate because it likely will benefit their ability to grow their HFO productions. So we still feel there's a tremendous upside on where we are. It's just that we're disappointed at the pace of growth and -- but we do think there'll be 3 drivers to help stimulate that growth, whereas all we had with the prior phase-outs were simply the guys that have made the law and drove the speed limit for the guys that did the recovery.

And maybe one more. Any help you can give us on the outlook? Obviously, you’re running well ahead of the targets you laid out for this year. So any color on Q4, whether it’s margins or otherwise? And then I assume you still feel very good about 2025 but I just want to confirm that.

Yes. We still feel very good about our long-term forecast and projections. We believe our Q4 for '22 will have some similar relationship for Q4 of 2021. Certainly, Q4 2021, you saw a significant increase in gross margins in that quarter compared to the historical levels. As we reflected in Q3 of this year, we're seeing a moderation of the gross margins which is what we expected that costs will begin to catch up. So we think Q4 '22 is going to look a lot like -- similarity to Q4 of 2021. But our long-term projections are still, we think, conservative and we ought to be able to get there.

And confirming that’s sort of similar top line but you think margins could be in that 40% plus range for Q4.

Yes, something in that range. So like I said, it's likely a similarity when you get to the operating line.

This does conclude today's Q&A session. I would now like to hand the floor back to management for closing remarks.

So thank you, operator. I’d like to thank our employees for their continued support and dedication to our business and to our successes here with our record performance. And I want to again thank our long-time shareholders and those that recently joined us for their support. Thank you, everyone, for participating in today’s conference call. I hope everyone has a happy and safe holiday season and we look forward to speaking with you after fourth quarter results. Have a good night, everybody.

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