Greetings. Welcome to the Hudson Technologies Third Quarter 2024 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, Jen Belodeau. You may begin.

Thank you. Good evening, and welcome to our conference call to discuss Hudson Technologies' financial results for third quarter 2024. On the call today are Brian Coleman, President and Chief Executive Officer, and Brian Bertaux, Hudson's 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 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 of the factors that could cause our actual results to differ materially. With that out of the way, I will turn the call over to Brian Coleman. Go ahead, Brian.

Well, good evening, and thank you for joining us. As we mentioned on our second quarter earnings call, the third quarter of 2024 included several industry developments, including the EPA's issuance of the final Refrigerant Management rule and the release of the 2023 reclamation and inventory data collected from industry participants as of December 31, 2023. Additionally, the third quarter marks the close of our nine month selling season and we have some pricing data to share. We'll get into the industry data points and our outlook moving forward a little later in the call, but first I will provide some color around our quarterly results. As you know, the 2024 cooling season was challenging and the third quarter revenues decreased primarily related to decreased prices for certain refrigerants, as well as slightly lower revenue from our DLA contract as compared to the third quarter of last year. To provide some perspective around the pricing dynamic, at the close of third quarter of 2024, HFC prices had declined an additional 20% from the pricing levels we reported on our second quarter 2024 call to approximately $6 per pound. There are several types of HFCs, so the pricing for any one might be different than others. When we talk about the price of HFCs, we're generally focused on the price of HFC-410A, which represents about 70% of the total aftermarket demand for HFCs. By way of context, HFC-410A was the most price competitive HFC during the sales season, while other HFC pricing was not as volatile. While this season's pricing dynamic is disappointing in the near term, pricing trends are only one element of our business model and we remain confident that the ongoing phaseout of HFCs will ultimately move prices higher as demand for HFC refrigerants begin to outstrip supply.…

Thank you, Brian, and good evening, everybody. Now, I'll turn to the review of our third quarter 2024 financial results with comparisons to the 2023 third quarter results. Hudson recorded $61.9 million in revenue in the 2024 quarter, a 19% decrease from last year's quarter. The decrease was related to lower refrigerant market prices and lower revenue from the company's DLA contract. As a reminder, our 2023 DLA revenue was higher than normal due to certain non-recurring purchases making for a tough year-over-year comp. Gross margin was 26% for the 2024 quarter compared to 40% in last year's quarter, reflecting the lower refrigerant market prices. SG&A was $8.1 million this quarter compared to $6.8 million in last year's quarter. The increase in SG&A includes higher personnel costs and professional fees. We recorded operating income of $7 million in the 2024 quarter, compared to $23.1 million in last year's quarter. We recognized $2.3 million in non-recurring other income in the 2024 quarter, which was primarily related to a litigation settlement. The company recorded net income of $7.8 million or $0.17 per diluted share in the 2024 quarter compared to $13.6 million or $0.29 per diluted share in last year's quarter. We strengthened our unlevered balance sheet, ending the quarter with $56.5 million in cash and no debt. As previously reported, our capital allocation strategy is focused on organic and strategic growth, as well as share repurchases. During the third quarter, we repurchased $2.6 million in common stock. In support of our capital allocation strategy, the company's Board of Directors recently approved and increased our share repurchase program, thereby doubling the amount of repurchases that we can make. Hudson may now purchase up to $20 million of shares of its common stock, consisting of up to $10 million during each of calendar year 2024 and 2025. Finally, I would like to reiterate our expectations for full year revenue to be at the low end of our prior guidance range with full year gross margin of approximately 28%, noting that fourth quarter gross margin is typically a low mark for the year due to lower volumes related to seasonality. I'll now turn the call back over to Brian.

Thank you, Brian. I'd like to reemphasize that despite the challenging 2024 selling season, our view of the company's long-term growth opportunity has not changed. As the ongoing HFC phasedown continues, we are confident that HFC pricing will ultimately move higher. We also believe that higher pricing of HFCs along with the mandated use of reclaimed refrigerant will advance the industry's embrace of recovery and reclamation activity and create enhanced profitability in our business. Hudson has the long-standing customer base, national footprint and proprietary reclamation technology to continue to grow our leadership role as our industry embraces new cooling technologies and refrigerants, and we look forward to capitalizing on the opportunities ahead of us. Operator, we'll now open the call to questions.

Thank you. [Operator Instructions] The first question comes from Ryan Sigdahl with Craig-Hallum. Please proceed.

Hey, Brian and Brian. Good afternoon.

Good afternoon.

You continue to reiterate, I guess, you expect pricing to move higher over time, but Brian, you alluded to the ending 2023 inventory, which we agree with, was fairly lackluster being down only 2% year-over-year and likely needing a petition to the EPA to accelerate that phasedown. So, I guess, if we don't get that petition and the EPA to accelerate it, are we looking at lower prices for longer and probably not seeing the imbalance until we get that big step down in 2029?

I mean, it's certainly a possibility. We don't know what 2024 will hold. 2024 demand should have been similar to 2023. So, we would expect some amount of reduction to that total inventory amount. But back to -- as I said in my prepared remarks, we're concerned that the allowance structure for '25 through '28 could be allowing for additional allowances relative to demand for those periods due to the shifting of the OEM demand on lower GWP refrigerants, which means they're going to use lower amounts on a metric ton of CO2e relative to a pound to pound comparison. So, there's still pieces to the puzzle that we don't know and certainly will know better going into next year, but we do want to indicate our concern for that period and we certainly would be supporting the concept of lowering the consumption allowances for the balance of through the '28 period.

Just a follow-up, Brian. What, I guess, entails that petition process? Can you give us a little more color on that? What would need to happen?

Well, think of it like a challenge to the EPA. Someone would have to put forth a rationale as to why with specific evidence and certainly possibly the inventory data would be that evidence for a reduction of the annual consumption allowances, even in light of the fact that they've already potentially issued those, meaning they prepare a rule for '24 to '28, which said they would keep the consumption allowances constant over time. It still could be challenged and then therefore amended. When you look to Europe, Europe has gone through a process and, in some instances, have lowered the annual allowances relative to what the minimum level are. And back to this point, when you look at the chart that might be -- you might find in our investor presentation and you see the stepdown over the periods, that's the minimum that the EPA could do. They can, in fact, go lower, but in this instance, since they've already issued the '24 to '28 rule, a petition would be the methodology to seek a lowering of the annual consumption.

Very good. Moving over to USA Refrigerants, the acquisition you just closed, what are you seeing there from an integration standpoint? And then, are you seeing what you hope to see from an accelerant on the recovery of refrigerant to fuel into your reclamation process?

Well, the integration is going extremely well and really on two fronts where they're bringing in some new customers to sell refrigerants to, but also giving us additional sources to bring in reclaimed refrigerant. So, we're seeing that working well on both fronts and some very good strategic sources of reclaimed refrigerant.

And maybe to add, we now are past the point of integration and really now including the strategies applied historically by USA to strategies to Hudson's existing customer base. So, one of the things that we had hoped for with regards to the Airgas acquisition was with their extensive customer base to be able to grow our ability to receive more recovered gas. With the addition of the USA team, we're now being able to execute into the Hudson customer base, particularly that customer base that was acquired in the Airgas acquisition.

Thanks. And one quick one. What was the litigation settlement gain related to?

It was really related to a commercial dispute and settled at the end of the quarter.

I'll hand it over to the others. Good luck, guys.

Thank you.

Thank you.

The next question comes from Austin Moeller with Canaccord. Please proceed.

Hi. Good evening. So just my first question here, it sounds like the depletion rate in the 2023 inventory has been slower than anticipated. So, would you expect any uptick in pricing during that 2025 Q3 -- Q2 to Q3 cooling season, maybe like $1 to $2 per pound?

It's very, very difficult to prognosticate pricing. And frankly, when you reflect on this particular year's cooling season, we saw a greater decline than we ever anticipated. And so, at some point, we're going to hit a floor. Are we at the floor or not? We don't know. But back to, let's say, increases in price, we think that it's important that we rely more on supply/demand economics as opposed to allowance holders acting in a particular way relative to price. So, the biggest price pressure HFC refrigerant is 410A. It appears from the inventory data, there's a significant amount of 125 and 32, and those are the two components that are necessary to build 410A. So, we are concerned that we're going to enter next year with similar pricing dynamics that we exited this year.

Okay. That's helpful. And when do you expect to see accretion on gross margins within your revenue mix to get back to your 35% long-term target? I guess just how should we think about the timing and cadence of that recovery?

Again, given the uncertainty in the pricing dynamics in this market, we would say that the 30% is probably a little bit further out until we see an increase in market prices. We do have some lower cost inventory pools we can pull against moving forward, but it also has to be complemented by higher market prices to be able to get back to that target gross margin range.

Understood. Thanks for the color.

Okay. The next question comes from [Matthew Moss] (ph) with B. Riley. Please proceed.

Hi. Thanks for taking my questions. It's Matthew calling in for Josh Nichols. I just have a quick question. So, you mentioned revenue from the DLA contract being down year-over-year. So, I was wondering how much revenue came from the DLA contract this third quarter and what your expectations are for the year compared to those that you laid out earlier this year.

Yes. So, we had mentioned a few times now that there were certain, we called it, surge buying under DLA contract that occurred in 2023 that we didn't necessarily think could occur in '24. Not that they can't, it's just that relative to managing the contract, it was unusual relative to the historical perspective. For the quarter, the DLA revenues were approximately $9 million. So, they're running at that rate that we tried to guide to as a mid-$30 million or low-$30 million annual revenue versus the $50 million-plus in annual revenue that we achieved in 2023.

Got it. Yes. Okay, cool. That was helpful. Thank you for taking my question.

We have reached the end of the question-and-answer session. I will now turn the call back to management for any closing remarks.

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

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.