Good day everyone, and welcome to the Hudson Technologies' Fourth 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 the fourth quarter and year ended 2022. On the call are Brian Coleman, President and Chief Executive Officer; and Nat Krishnamurti, 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 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. With that out of the say, I will turn the call over to Brian Coleman. Go ahead, Brian.

Good evening and thank you for joining us. 2022 was a tremendous year for our company, highlighted by record revenues and profitability and significant debt reduction. We closed the year with solid fourth quarter results including revenue growth of 26%, largely driven by increased selling prices for certain refrigerants and increased volume in the period. As many of you know, the fourth quarter is seasonally our weakest quarter because it falls outside our nine month January through September selling season. Gross margin in the quarter moderated to 32% just below our long range gross margin target of 35%. This slightly lower margin performance doesn't change our current view for our long-term target. As we previously mentioned, we anticipate that gross margins will moderate sequentially from the 2022 levels in 2023 as the gap between inventory costs and sale prices narrow. Our operational success throughout full year 2022 drove enhanced profitability and strong free cash flow, allowing us to substantially reduce our total outstanding debt from approximately $95 million at year end 2021 to $47 million at year end 2022. We remain focused on continuing to grow our customer base through strategic relationships with customers who share our vision of the circular economy for refrigerants and are reviewing acquisition prospects, as opportunities arise due to the implementation of the AIM Act. As our industry continues to evolve and the commitment to recovering and reclaiming refrigerants becomes even more important, we will continue to emphasize our focus on working with those, who share our vision for adoption of sustainable and responsible refrigerant management. With that in mind, we are actively involved in promoting our sustainable products, services and consultation capabilities to the marketplace at industry events. To give you a flavor, 2023 got off to a strong start with our presentation to…

Thank you, Brian. For the fourth quarter ended December 31, 2022, Hudson recorded revenues of $47.4 million an increase of 26% compared to revenues of $37.8 million in the comparable 2021 period. The growth was driven by increased selling prices for certain refrigerants during the period as well as increased sales volume in the quarter, as compared to the fourth quarter of 2021. Gross margin was 32% for the fourth quarter of 2022, compared to 45% in the fourth quarter of 2021. As Brian mentioned, this is just below our long range gross margin target of 35%. However, we don't believe this slightly lower margin performance in the quarter will have any impact on our long-term target as fourth quarter margins are frequently lower than margins achieved in the selling season. As we previously mentioned, we anticipate that gross margin will moderate sequentially in 2023 as the gap between inventory cost and sales price narrows. SG&A for the fourth quarter of 2022 was $7.5 million compared to $7 million and the fourth quarter of 2021. SG&A has grown as the Company invests more in personnel and IT costs. We recorded operating income of $7.1 million in the fourth quarter of 2022 compared to operating income of $9.3 million in the fourth quarter of 2021. The Company recorded net income of $5.1 million or $0.11 per basic and diluted share in the fourth quarter of 2022 compared to net income of $6.2 million or $0.14 per basic and $0.13 per diluted share in the same period of 2021. For the full year ended December 31, 2022, Hudson reported revenue of $325.2 million, an increase of 69% compared to revenues of $192.7 for a full year of 2021. The revenue growth was driven by increased selling prices for certain refrigerants during the…

Thank you, Nat. Our 2022 selling season was very strong, and we are focused on preparing 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 will now open the call to questions.

[Operator Instructions] Your first question is coming from Ryan Sigdahl from Craig Hallam Capital Group. Your line is live.

Congrats on the strong results last year. Want to start with pricing. I didn't catch it if it was in the prepared remarks, but what are you seeing, I know, it's seasonally quiet right now, but what are you seeing with R-22 and HFC pricing?

R-22 continues to be strong. It's definitely in the 30s and has pretty much been that price range for last year and certainly going into this year. In the third quarter, reporting, we noted that in the latter part, like say September of last year, prices started to decline from, let's say a high, generally speaking, HFCs as a category around $14 a pound to around $12. That softer pricing has gone into the beginning of this season. We don't know how pricing is going to play out, but we do think there's opportunities for higher prices, particularly as people start to become aware or think more about what the significant shortage might be for the 2024 year with the 40% step down and the virgin allowances starting then.

Got it. And then just on the gross margin the quarter, the 32%, how much of that was impacted by just pricing declines? I guess I don't know what the mix is, if it's any different in Q4 between R-22 and HFCs, but what played into that?

It was really just overall volume relative to our overall fixed cost. So nothing particularly special -- like as Nat said, I think, I said the same thing that we don't believe has any impact on our long term targets. As our margins will continue to drop towards those levels, the fact that Q4 of 2022 happen to be below it, we'll really have no impact on where we land this year and as we proceed in the future.

What's your confidence you've talked about 35% gross margins as your medium-term target? Is that a good baseline for 2023?

Well, it is a baseline certainly for 2023 and beyond. The question is when might we get to that level on a consistent basis? We still think there is some upside to the margin. But right now, I think, thinking of it in the context of 35% makes the most sense.

Good. Switching over to reclamation volume, you mentioned a lot of proactive steps, seminars, presentations, education, et cetera, all very good from our view. Have you seen any improvement in the recovery of feedstock really fuel the process?

Unfortunately, reclaim continued to be flat again last year, as it's been for the last couple of years. To some extent that then ties into some of our frustration that we have expressed about the EPA and promulgating regulations. But based on their public comments, they have already started a process, which would lead to a proposed rule, likely issued in around September of this year that addresses regulations to promote the growth of reclamation. Moreover, we know that with that 40% reduction in 2024, there is going to be shortages and when there is shortages, there is growth in reclamation.

Thank you. Your next question is coming from Gerry Sweeney from ROTH Capital. Your line is live.

Hi. Good afternoon, Brian and Matt. How are you guys doing?

Good, good, thank you.

Obviously, the big question is increasing reclaim. But I'm curious, if there is other channels where you can go out and get more capacity, I mean, your inventories are up in the quarter nicely which is positive going into this year. But can you go out and buy inventory from, I don't know, other participants, et cetera. Just curious if there's other ways to sort of manage that or take advantage of it? Or is there a secondary market?

Well, I mean, we have many suppliers. So I don't know that, we really have limitations based on suppliers. The thing that we are trying to spend a lot more time on than we might have in the past is with contractors around recovery. So, it's recovery that leads to increases in reclamation, simply put. If contractors don't recover the gas then there isn't gas to reclaim. So, we talked about a lot of different initiatives, and if you heard some of the descriptions, a lot of it was centered at the contractor level and training on recovery as well as the importance of reclamation. So, we think that, as we begin to take a more proactive role at that level, we could stimulate more recovery, which hopefully then, as we expect will lead to more reclamation pounds.

And on that front, stimulating more recovery also goes hand-in-hand with sort of paying for that gas and making sure that money gets into the hands of the contractor because there is a time and value of time associated with the collection that could be potentially otherwise going on to another sort of job. Is anything working around that or some of these EPA regulations that you're alluding to maybe help increase that opportunity?

I'd say from an economics point of view, last year, we were able to eliminate all fees. So prior to last year, the sale price of HFCs was relatively low. And there would be refrigerants that are recovered, that are in our industry will refer to as cross contaminated or co-mingled. In low economic times, those refrigerants are really more of a cost than an asset. But now with the value of HFC being as high as they are and with our robust fractional distillation capacity, we're able to pay for even the poorer quality refrigerants. So hopefully, economics isn't a barrier any longer for contractors to do the recovery. We think the barrier though is changing behavior. We think the barrier is lack of training, maybe even poor equipment. So, we're supporting new recovery techniques and training. And if necessary, we'll support new recovery equipment. Whatever we can do to help stimulate the recovery will lead to further growth and reclamation.

Got it. Any way you could develop a direct contact with the contractors to get it back? Or does that sort of, I know, you don't want to -- you have different ways to go to mark, but you also don't want to upset some of your supply houses and distribution counter, but I'm just curious if there's an option there as well?

We could get cylinders basically anywhere coast to coast in the United States. There's a tremendous infrastructure of LTL that we could pick up cylinders just about anywhere. So, I don't think logistics and freight is going to be an issue or its capacity. We definitely have access to capacity to handle more cylinders. I think, handling cylinders and more importantly, returning cylinders on a timely basis can be difficult for other reclaimers, particularly with long lead times on cylinder manufacturing, things like that. So again, we try to plan to be ahead of the game as we go into any particular season to be able to pick up additional capacity and volume.

That is it for me. I am looking forward to '23. Hopefully it's hot, dry, and fun, so thanks.

We're looking forward to it too. Thank you.

Thank you. Your next question is coming from Chip Moore from EF Hutton. Your line is live.

Congrats on the great year as well, and I'll echo my wishes for a good cooling season. Brian and Nat, maybe if you could talk update us on maybe any state level initiatives which you're seeing out there, and then on the OEM equipment dealer side progress there and some of the trends?

So, there's probably at this point 25 states that are in different advanced stages of regulating HFC refrigerants. Most of the focus now is headed towards equipment and GOP and charge sizes, so that they're advancing the idea that to enter commerce into their particular state, you're likely going to have to sell equipment with very low GDPs. Most of those state level regulations legislation are close to the federal and the AIM act. Some are a little bit different. The industry, Hudson are trying to tie some state initiatives backwards towards what the AIM Act provides so that we have one solution throughout the United States. At the end of the day, it's possible though some of the states will go beyond and have more restrictions than what the federal AIM Act provides currently. But that's probably going to take a handful of more years to develop from where we're today. We do like the idea of the California mode regarding requiring OEMs to use a certain portion of the factory charge of reclaim refrigerants. We certainly encourage that thought process as other states implement their particular legislation. We certainly encourage thinking in that vein as well at the federal level. It's difficult to say what the EPA may or may not do, but we're hopeful that as the EPA deals with the equipment transition rule and then leads into the refrigerant management rule, which may come out the proposed rule may come out in September, may begin to address issues like that.

Got it. That's helpful. And maybe one more from me more on the capital allocation side, I think, Brian, you mentioned, kind of actively reviewing acquisition targets. Are you seeing a pickup in activity and are you seeing sort of that complexity and some of those issues out there? Is that leading to more of these mom and pop-type entities potentially seeking exits? Are you starting to see some of that trend or is it still a bit early for that?

I do think there's folks out there, they're seeing the writing on the wall sort of, not that it's here and now, some of the restrictions really are not going to take effect until, like, say 2025 and beyond. We still don't know where the particular lawsuits going to land regarding the current EPA requirements for the industry to move towards reusable cylinders versus one way or disposable cylinders. I don't know when that case will be determined, but probably could be maybe as early as June could be as late as September. That also will give some visibility about whether or not people in our industry are going to have to invest in reusable cylinders. We do have a large reusable cylinder fleet just because of the dynamics of our business. But that's something that could impact others, whether they'll have the ability to invest in the seal. So I think it's a little early for folks to panic per se. But certainly, I think people are beginning to think about what they might need to do in say 2025 and beyond.

Interesting. Some sort of the Worthington concerns on cylinder some that could be an issue for some folks. Regardless, just you're de-levering and your position, and even any macro slow down, you'd like your potential to scoop up some targets. Is that fair?

Yes, no, we're definitely active. We're certainly speaking to folks. But to your question, I don't think anyone feels like they have a gun to their head at this point, and certainly, most of these transactions do take time.

Yes. And longer term on more of that sort of service opportunity. Is that an area you're investigating as well?

Yes, and there is already a lot of private equity money in this area and a lot of consolidation. So, it is something that we would want to try to be as disciplined as possible on valuations, but recognizing there may be competition.

Thank you. Your next question is coming from Ryan Sigdahl from Craig-Hallum. Your line is live.

Just two follow-ups from me. Curious on inventory. So grew pretty sizeably year-over-year, but more so sequentially, curious how much of that is price increase versus volume increase? And then one follow-up.

Yes, it's mostly pricing. Obviously, with the selling prices going up over the last year, buy price has gone up as well as we previously communicated.

Yes. Generally, our philosophy is not like to somehow go long on inventory.

Makes sense. Then just one, we saw on the EPA earlier this week we saw them in force, HFC restrictions on three companies that were not accurately reporting their HFC imports. Curious, if you have thoughts on that enforcement and potentially the EPA actually starting to do a little bit more here?

Yes. No, I think the EPA in this area, I think the EPA has been doing a great job both in constructing regulation that hopefully will prevent any illegal imports or limit illegal imports, as the alliance and the legal import committee of the alliance have been looking at for probably six, seven years now. I do think there is more and more requirements of data, and the EPA staff is absolutely reviewing the data and accuracy. So, we are very pleased with those actions. And we can't say that, we know more than what's reported, but hopefully, they'll continue to monitor activity and who's reporting and be very aggressive as it relates to those who were not obeying rules and regulations.

Thank you. That concludes our Q&A session. I will now hand the conference back to Brian Coleman, Chairman and CEO of Hudson Technologies for closing remarks. Please go ahead.

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

Thank you everyone. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.