Greetings and welcome to Hudson Technologies Fourth Quarter and Year-End 2023 Earnings Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, John Nesbett of IMS Investor Relations. John, you may begin.

Thank you. Good evening and welcome to our conference call to discuss Hudson Technologies financial results for the fourth quarter 2023. On the call are Brian Coleman, President and Chief Executive Officer, and Nat Krishnamurti, Chief Financial Officer. Now take a quick 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, and predictions about the future of 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 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 the factors that could cause actual results to differ materially. With that, I'll now turn the call over to Brian Coleman. Go ahead, Brian.

Good evening and thank you for joining us. 2023 was a strong year for our company, highlighted by consistently strong cash flow, profitability, and extinguishment of our term loan debt. We delivered a solid fourth quarter, consistent with our historical performance for this period. As many of you know, the fourth quarter is historically our weakest as it falls outside of our nine-month selling season of January to September. We had a difficult comparison in the fourth quarter of 2023, as the fourth quarter of 2022 benefited from higher sales prices for certain refrigerants, which favorably impacted revenue and margin performance in that period. In the fourth quarter of 2023, we recognized revenues of $44.9 million, a decrease of 5% compared to the fourth quarter of 2022, despite a 24% decline in selling prices. We were able to offset the pricing decline thanks to increase in volume and increased revenues from our DLA or Defense Logistics Agency contract serving the Department of Defense. In 2023, we saw the highest annual revenue generated by our contract with the DLA at $53 million. That said, we believe that approximately $20 million of the 2023 DLA revenue was related to increased DLA-specific program activities that may not be repeated in 2024. Consequently, we may see DLA annual revenues return to more historical levels in 2024. Gross margin in the quarter was 31%, which is slightly lower than last year. Consistent profitability and operating cash flow has allowed us to eliminate over $100 million in outstanding debt originating from the first quarter of 2022. In the third quarter of 2023, we fully repaid our term loan well before its March 2027 maturity date. These operational successes and the elimination of debt have allowed us to significantly strengthen our balance sheet and provide improved financial…

Thank you, Brian. For the fourth quarter ended December 31, 2023, Hudson recorded revenues of $44.9 million, a decrease of 5% compared to revenues of $47.4 million in the comparable 2022 period. The decrease was primarily related to decreased selling prices for certain refrigerants, offset by slightly higher volume. Gross margin was 31% for the fourth quarter of 2023, slightly lower than fourth quarter 2022, and coming in below our long-term range gross margin target of 35%. As you know, the fourth quarter typically is our lowest refrigerant volume and gross margin quarter. SG&A for the fourth quarter of 2023 was $8.5 million compared to $7.5 million in the fourth quarter of 2022. SG&A has grown as the company invests more in personnel and IT costs. We recorded an operating income of $4.7 million in the fourth quarter of 2023 compared to operating income of $7.1 million in the fourth quarter of 2022. The company recorded net income of $3.9 million or $0.09 per basic and $0.08 per diluted share in the fourth quarter of 2023 compared to net income of $5.1 million or $0.11 per basic and diluted share in the same period of 2022. For the full year ended December 31, 2023, Hudson reported revenue of $289 million, a decrease of 11% compared to revenues of $325.2 million for full year 2022. The revenue decline was primarily related to decreased selling prices for certain refrigerants. Gross margin for full year 2023 was 39% compared to gross margin of 50% in the prior year period. The margin decreases primarily related to reduced selling prices and increased cost of refrigerant product, slightly offset by higher margin DLA and carbon credit sales. Hudson reported operating income of $78.2 million for full year 2023 compared to operating income of $131.5 million in…

Thank you, Nat. 2023 was a strong year for our business and an example of what we can accomplish when we execute on our business strategy and leverage our position as a leading provider of sustainable products and services for the refrigerant and reclamation industry. We are optimistic about our long-term prospects, particularly as the EPA and various states execute on initiatives to promote the growth in reclamation. Operator, we will now open the call to questions.

[Operator Instructions] And the first question today is coming from Ryan Sigdahl from Craig-Hallum. Ryan, your line is live.

Hey, good afternoon, Brian. I'm curious what you're seeing from R22 and R-410A or HFC [Technical Difficulty].

Ryan, are you there?

Apologies, we seem to have lost Ryan's line. One moment. Hey, go ahead, Ryan, sorry.

Can you guys hear me?

Yes, go ahead.

Yeah, Ryan, maybe start at the beginning. We lost you at some point, sorry.

Well, good afternoon, guys. I just want to start on pricing. I know you said lower, but I'm curious if you could quantify kind of what you're seeing on the R22 side versus the HFC side and then how that's trended through the quarter and then now through March?

So Q4 quarter, HFC pricing and R22 pricing were fairly consistent as we updated back in November. And around that $10 price, it had a slight uptick from what was the low probably in Q3. As it relates to 22, we think 22 will remain constant and steady, if you will, pricing in, let's say, that $30 a pound range that we've talked about before. It's really early in the year, but a few HFCs, not all, we've seen some price pressure on below, let's say, $10 in that $8 to $10 price range, but only a handful, not necessarily all of them. So we've not seen this type of break in pricing in the past, but right now for the moment, and a two month view of the ‘24 selling season, we're seeing a little bit of break in some prices.

Great. DLA, are you willing to quantify what it was in Q4? I know you gave the year and then how that compared to a prior year?

As it relates to DLA, it was fairly consistent through the year, but we were getting signals that they weren't going to be buying the types of products that we saw them buy throughout the year that we're now attributing to these additional purchases or surge purchases or non-recurring purchases. Now we could be wrong, but we started to see this increase in Q1 of ‘23, and we know for certain in Q1 ‘24 there will not be any of these types of purchases. It will be more business as usual or the past volume activities. It doesn't mean that things could change later in this year. And so we're trying to be cautious and let folks know that possibly about $20 million of the $53 million may be more non-recurring than recurring.

Got it. One more financial. SG&A stepped up a little bit more than the normal in the quarter. I guess this is a new trend. And then what was that incremental spend on specifically in the quarter?

Yeah, incremental trend. I’d say incremental spend, I would say it's more on the personnel and the IT side as we invest more in each of those areas. And I would say that's probably closer to the run rate for the future.

Great. Thanks, guys. Good luck.

Thank you.

Thank you. The next question is coming from Josh Nichols from B. Riley. Josh, your line is live.

Yeah, thanks for taking my question. Just as a follow-up, I know you mentioned you didn't expect any DLA-specific project revenue in 1Q of ‘24 relative to last year. How much revenue was received for at least project-specific DLA revenue in the first quarter of last year? Just trying to get a gauge for how much 1Q maybe down quarter-over-quarter, year-over-year, relative to what you did last year just based on the DLA project specific stuff?

Yes, so the DLA increase and let's just say this extra $20 million possibly, although like I said it could come up later in the year, was fairly even. So you're talking about something close to, let's say, probably not quite $5 million, but close to $5 million and that $20 million spread out pretty evenly over the quarters.

I appreciate the color on that. And then pretty big increase in inventory, right, for the quarter. I know that you're probably gearing up for an anticipated increase in reclamation refrigerants. I'm just curious if you could kind of provide a little bit more color on the ramp-up in inventory and what you're seeing there and the expectation as we move through the year.

Yeah, you're really seeing, let's say, that seasonal buying and that you might historically see in the latter part of the year. So what'll typically happen is we'll begin to stock up in Q4 for sales into Q1 and Q2 of the following year, you'll typically see the inventory start to come down and then you'll start to see it in the latter part of the year build back up. Right now, we don't envision any material dollar increases necessary for inventory through this particular year and that we would probably end up at the end of next year with about the same total dollars in inventory in December 2024 as you're seeing at December 2023.

Thanks, Brian. And then last question for me. You mentioned it. I mean you become a debt-free entity, you're generating a bunch of cash, right, even with relatively subdued refrigerant prices today, at least on the HFC side. I guess your thoughts on the likelihood of potential M&A opportunities on the near term, are you seeing an increasing pond to fish from, so to speak, already? Are prices attractive or elevated relative to historics? I'm just curious for some context.

Yeah, I'll start with it. Our primary focus as far as the use of cash is concerned is inventory. In other words, if prices do go up later on in the year, we have to govern that first and foremost. But then secondarily, to your point, M&A is of definite interest to us. So we just have to be patient in the right type of acquisition. As we've mentioned in the past, we're just not here to roll up a bunch of acquisitions. We want to be very smart and very intuitive in terms of the types of benefit that we get from a potential acquisition. And this can include -- it could include customer lists and other things like that, customer relationships, and to provide like other types of synergies that we need in our business to help cross-sell.

And maybe just to add one other thing to that, we have done quite a number of acquisitions over the last 20 years. I would say, though, there's a little bit more competition or more dry powder available for private equity to complete acquisitions and particularly interest in the HVAC industry. So we've run into, let's say, more competition or acquisition price pressure because of some of those activities and those funds. We haven't changed our overall view about valuation. And so we hopefully tend to be on the conservative side of valuation when we eventually complete acquisitions. But we still think we will have an advantage over private equities because I do think we have a particular reputation in the industry. Typically when we do complete an acquisition, we're looking to keep management and staff. It's often the people that have the value in that transaction. So I think we have some advantage but there is pricing pressure right now in the market.

Thanks guys. Appreciate it. I’ll hop back in the queue.

Thank you.

Thank you. [Operator Instructions] The next question is coming from Leanne Hayden from Canaccord. Leanne, your line is live.

Hi everyone. Thanks so much for taking my questions. So just to start, and to the extent that this is repetitive, I do apologize. I've had some connectivity issues throughout the call. But regardless, do you expect this year's HFC refrigerant price increases to sufficiently offset the expected $20 million of non-recurring from the DLA contract?

So that's a good question and at the moment difficult to answer. We're so early in the season. As you can imagine, there's no warm weather. The AC or comfort cooling really drives demand. We will start to see some increase in that demand in the southern states, Texas, Florida and so forth, hopefully in the near term here. And once we get into Q2, we'll have more confidence about how we think our 2024 pricing relative to the selling season will look at. Right now, we don't really have sufficient information to be able to predict what will happen with price. Generally speaking, we do think that prices would be up in 2024 because of the reduction in the availability of virgin production and consumption.

Okay, right. That makes sense. All right. Thanks for that. And then just secondly for me, are you able to disclose which classes of refrigerates experience lower Q4 pricing relative to higher sales volume?

Yeah, so sorry, that was the -- when we are generally today talking about price, we'll be distinguishing HFC pricing as a complete bucket, but there's about 20 different HFC refrigerants, versus let's say R22. So when we were talking about some of the pricing pressure and some refrigerants pricing right now today slightly lower than how we exited last year, we were talking about that HFC class. As it relates to R22, we said a little earlier that pretty much the price of R22 is stable and around that $30 a pound price.

All right, understood. Got it. Thanks so much, you guys.

Have a good evening.

Thank you. There were no other questions at this time. I would now like to hand the call back to Brian Coleman for closing remarks.

Well, thank you, operator. I'd like to thank our employees for their continued support and dedication to our business. And both are long-time shareholders and those that recently joined us for their support. We look forward to speaking with you after the first quarter results. Have a good night, everybody.

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