Good day, everyone, and welcome to the Hudson Technologies Second Quarter 2025 Earnings Call. [Operator Instructions]. It is now my pleasure to turn the floor over to your host, Jennifer Belodeau of IMS Investor Relations. Ma'am, the floor is yours.

Thank you. Good evening, and welcome to our conference call to discuss Hudson Technologies financial results for the second quarter of 2025. On the call today are Brian Coleman, President and Chief Executive Officer; Brian Bertaux, CFO; and Kate Houghton, Hudson's Senior Vice President of Sales and Marketing. 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 express 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 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 other factors that could cause our actual results to differ materially. With that out of the way, I'd like to turn the call over to Brian Coleman. Please go ahead, Brian.

So good evening, and thank you for joining us. As sometimes happens, we had a slow start to this year's cooling season. which is why we always refer to a 9-month selling season rather than looking at it quarter-to-quarter. Our industry is driven by comfort cooling, so we are obviously weather dependent, but we focus on things that we could control. That focus is centered on ensuring we best serve our customers needs at all times, which can mean we are buying the recovered refrigerant or selling the refrigerant to meet theirs or their end customers' demand. During the quarter, we did see a lift in nearly all refrigerant pricing, some of which had to do with tariff increases. However, we did experience slightly lower sales volume when compared to the second quarter of last year. In spite of the external conditions such as the cooler spring weather and supply shortages relative to replacements of lower GDP refrigerants, we posted solid second quarter results with revenues of $72.8 million and gross margin of 31%. During the quarter, we saw continued strength in our reclamation business as we leveraged our enhanced refrigerant recovery capabilities, we remain focused on expanding our purchasing presence in the marketplace with both new and existing customers as we've historically done. We'll provide a more detailed update around the progress in our reclamation business as the full year wraps up. As we've often mentioned, recovered refrigerants returns typically trails refrigerant sales by 1 quarter each season. DLA orders during the second quarter were in line with our expectations and our anticipated annual order run rate for the DLA contract. We are now entering our 10th year serving the DLA and DoD needs, and we believe we will have information on the new contract award results later this…

Thank you, Brian, and good evening, everyone. As Brian mentioned, our second quarter sales volume was impacted by prolonged cooler weather in the Northeast and Midwest, where temperatures didn't meaningfully warm up until mid-June. As you know, our sales cycle is typically driven by the first few hot days of any summer when cooling systems are activated and operating issues present themselves, resulting in a service appointment. We are encouraged by the increased sales activity we saw late in the second quarter, which is continuing into the third quarter. Throughout every selling season, we focus on the parts of our business that we can control, which include making sure our customers have the refrigerants they need where and when they need them and promoting recovery and reclamation activities as our industry transitions to lower GWP equipment and refrigerants. Our long-standing customer relationships have thrived based on our ability to provide our customers with a full range of the refrigerants to efficiently run their business, combined with their reciprocity in returning to us the recovered refrigerants that fuel our reclamation business. We remain confident that the current phase down of HFC refrigerants represents a significant long-term growth opportunity for Hudson as reclaimed HFCs will be increasingly necessary to allow the installed base of units to achieve their full economic life as the supply of virgin HFCs becomes more limited. As a reminder, HFC equipment currently represents the largest portion of the installed base and typically has a lifespan of approximately 20 years. So the demand tail for HFC refrigerants is expected to be long. With our national footprint and robust customer network, we have the ability to drive sales growth for new refrigerants while also serving as a proponent and resource for recovery and reclamation activities as we bridge the supply…

Thank you, Kate, and good evening, everybody. I will now review Hudson's second quarter 2025 financial results with a comparison to the second quarter of 2024. Hudson recorded $72.8 million in revenue, a decrease of 3%. As Brian and Kate noted, refrigerant sales volume was slightly lower than last year due to a late start to the summer weather in the Northeast and Midwest. This was partially offset by an increase in the average selling price of refrigerants. Gross margin was 31% compared to 30% in the 2024 quarter, with the improvement driven by favorable trends in market pricing. Gross profit at $22.8 million was slightly higher than the 2024 quarter. While the gross margin in the second quarter improved due to favorable market pricing trends, we are maintaining our full year 2025 gross margin target of mid-20% with some upside potential as we've seen slight moderation in pricing levels thus far in Q3. We posted $9.3 million in SG&A expenses, which was slightly higher than last year due to increased staffing. The improvement in gross profit, which was offset by increased SG&A costs, put operating income at $12.7 million, just shy of the $12.8 million posted last year. We recorded net interest income of $700,000 compared to net interest expense of $200,000 last year, reflecting the improved liquidity from the company's unlevered balance sheet. Hudson recorded net income of $10.2 million or $0.23 per diluted share compared to net income of $9.6 million or $0.20 per diluted share in the 2024 quarter. The company strengthened its unlevered balance sheet, ending the quarter with $84.3 million in cash and no debt. Our capital allocation strategy remains focused on organic and strategic growth as well as opportunistic share repurchases. In keeping with this strategy, we repurchased $2.7 million of stock early in the second quarter. We have purchased $4.5 million in shares thus far in 2025. I will now turn the call back to Brian.

Thank you, Brian. In the short term, we remain focused on driving strong execution as we move through the balance of the selling season to ensure we are meeting the refrigerant and servicing needs of our customers. Long term, we believe our recovery and reclamation capabilities position us well to become a supply source of reclaimed refrigerants as ongoing phase downs limit the supply of newly manufactured refrigerant. Our industry will continue to pursue the development and use of lower GWP refrigerants. And Hudson has the expertise, facilities and distribution network to bridge the transition for all types of refrigerants. Operator, we'll now open the call to questions.

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

Nice quarter. I want to start with just industry. We've been hearing others talk about repair mix being up in the quarter given supply challenges on the R-54 and A2L side, both system and gas. Did you guys see any benefit from that via your HFC and kind of aftermarket business? And then did you participate directly in any of that aftermarket sell into the A2L from a new system install standpoint given systems were, in some instances, supplied by the aftermarket versus precharged and sold?

Sure. We did see repair versus replace being an element of Q2 activity, leading to relatively strong demand in our core business. We do already participate in the aftermarket sales of A2L refrigerants, both 454B and 32. So we're really covering both the existing HFCs and also already working in the A2L space in the aftermarket.

Kate, are you able to quantify kind of how big the A2L market is for Hudson?

At this point, it's relatively small. There is an aftermarket demand because many systems in the installation need a small amount of refrigerant due to the change in charge on OEM units, but it's still small relative to the overall business at this point.

And maybe one thing to add, Ryan, to that question. You're still seeing the sellout of, let's say, 410A equipment or other equipment that was manufactured in '24. That sellout is happening pretty rapidly. So possibly, although we're not giving guidance on next year, but you could possibly expect to see almost a doubling in volume with A2Ls next year because at that point, there should be no 410A or other high units [indiscernible] in the system to be then installed. So we're on a growth trajectory of what the future will be for both 454B and 32.

Maybe just a follow-up question on that, Brian. I guess we were hearing shortages, so there was more kind of aftermarket charges versus precharged systems. I guess, assuming supply chain is more normalized by next year, you still think you can double the A2L and HFO volumes, even considering will still come precharge from the factory?

So what you're referring to is that the units come precharged from the factory. However, the charges are supporting less of a line set for installation than some of the traditional HFC units have. So it's unclear if the OEMs will make significant changes to that going into next year. So at this point, we do think that doubling of that volume in the aftermarket for installation is very reasonable.

Very good. Moving over to HFCs. What's the current price? I know you said $8 it kind of peaked out at in the quarter, but what's the current price there?

It's peaked out around $8. Sometimes it's a little above. And again, when we say 8, we're really talking about 4 today. We've seen a slight retraction in that price, but we're pretty much steady in that range.

Good. And then can you quantify from a reclamation standpoint, whether it's volume in that you've bought or volume out, whatever you want to quantify, but kind of how much that's grown and where the reclamation business is at?

So we don't report reclamation activity until the end of the year, but we're encouraged by the activity that we have going into Q3.

Probably at this point, the influence like of the USA acquisition kind of is difficult to break out any longer because it's fully integrated. So certainly, the USA acquisition and the team that came over jump-started our growth rate, but we've added new initiatives to support what they were doing and broaden that across the country. So we're probably not going to be separating, let's say, USA reclaim activity versus Hudson activity any longer. Very good. Last question for me, just on the HFC kind of -- sorry, jumping around back to that, but how do you feel about the stockpile kind of current in-channel inventory at this point?

It's a good question to ask, but it's still a little early for us to answer directly. First off, hopefully, everyone knows the EPA should be releasing the 2024 inventory data. We think it might be September, October, and that we'll be able to talk about that relative to our third quarter results. We do think that there is some stabilizing, let's say, between the annual allowances and the overall demand, where in the past, we were a little concerned that the allowances may be ahead of demand. But again, it's really hard to tell because back to some of your early questions and your good channel checks, there was a lot of difficulties forecasting what the 454B and 32 demand, particularly for the aftermarket would be for this year. And because a lot of the producers that were involved in those products were adding a significant amount of capacity and finally getting to the point where I think they're catching up and equaling supply and demand, it's hard to say how that's impacting all the other HFCs. But we'll report all that in the third quarter.

Your next question is coming from Gerry Sweeney from ROTH Capital.

A couple of quick questions here. Channel checks our channel checks indicated even though 2Q started slow, our understanding is volume and demand has been very strong across most refrigerants up until end of the week last week. Just curious if you could give a little bit of detail on volumes. And I know August 15 is sometimes the flipping point for the heating and cooling season, but any thoughts on just the trend on volumes going forward?

Well, I think it's the equivalent of 105 degrees here in New York. So I'm not sure that August 15 is going to be the date this year, Jerry. It's a good thing. 105 in humid. So...

I feel your pain. I'm in silly.

So we'll see what happens there. Yes, we've seen strong -- in that mid-June, we've seen strong volume and activity, and that's continuing up until now. And so again, with the heat around the country in a lot of areas, we're continuing to expect to have a very solid Q3.

Got it. comment in the prepared remarks about the EPA and the AIM Act and discussions. And when the AIM Act came about, my understanding was probably bipartisan and hit a lot of key areas people were looking for, right, because it was a new molecule, it was patented. It blocks some growth or some refrigerants from China because it's a new molecule. It was an equipment upgrade cycle, right? So that's sort of, we'll say, the right side of the aisle like that, the left side, like the phaseout of GWP refrigerants. Just curious if there's anything we should be looking further into what's going on with some of those discussions or any changes, but it seemed like it checked a lot of the right boxes the last go around. So any comments on that front?

Yes. So again, if we all go back in time, President Trump executed the AIM Act in December 2020. There is just a lot of difficult signals to interpret relative to either what you might hear out of the White House or even what you might hear out of the EPA administrator. Clearly, they are looking at many -- I can't say all, but many regulations and looking to dial back regulations that they deem somehow negatively impact the competitiveness, let's say, of U.S. business. Now I'm sure it's a lot broader than that, and there's a lot more complications for that. Even recently, you heard the EPA administrator talk about they no longer are deeming carbon emissions as hazardous to human health. Again, that kind of statement probably doesn't necessarily have a direct impact to the AIM Act and the components to the AIM Act. It probably affects a lot of other areas regarding other emissions and things like that. But no matter what, Hudson and I'd say the rest of the industry is very, very diligent currently with both the EPA and with Congress to reinforce how we got here and why we got here and how the AIM Act really was a bipartisan policy and law. And we feel still very strongly that reclamation without a doubt is very important for the long-term benefit of American consumers because without reclamation, it's likely you will not be able to attain the full economic life of your unit, which therefore, means you're going to have to accelerate a capital outlay. And for, let's say, a residential unit like in your home, you're talking about maybe $12,000. So it's not cheap. So we think this administration and the EPA recognizes the value of reclaim and we'll continue to support that.

Got it. Okay. Sticking with the Reclaim theme here. Obviously, I know you don't want to get into the volumes or anything like this. So this is more of a qualitative question on that front. But Ralph, doing a lot of seminars teaching, et cetera. Are you noticing maybe a different tone or tenor with some of the contractors? Do you think more and more people are understanding it or more people are attending? I'm just curious of maybe some of those grassroots type of upswell of maybe where reclaim is headed.

Yes, it's a great question. And we do, do a lot of speaking. We're out doing webinars and podcasts and conferences, and it's a significant part of the education process that we undertake here. I really believe that it's starting to take a hold. Every time we talk to an audience, we still have contractors say, are you kidding me? Are you really going to pay? Are you sure there aren't fees? But we're starting to, again, reach more and more folks. And once we have a contractor that does a recovery and sends it in and does the return and gets the check, it's just something that they do over and over again. It becomes second nature becomes part of their business. So we think there's about 500,000 contractors in the country. We probably haven't talked to half of them yet, but we're well on our way.

Your next question is coming from Josh Nichols from B. Riley.

Great to see the good margin even with what you said was a little bit slower start to the year. It seems that things ended on a high note, which is good to see, and that's been carrying through. Just for context, I was going back in some of my notes. If we look at like the back half of next year -- sorry, of last year of '24, HFC prices were down to like $6 a pound, right? I think -- and where they are today, if they're right around that $8 a pound level, I guess without going too much down the rabbit hole in terms of guidance, like fair to assume that you would expect revenue and gross margin to be up 3Q and 4Q if pricing maintains where it is through the remainder of the year?

Yes. Well, as we noted in the script, you really can't rely on Q4. It's just out of season. So we do expect to have a strong Q3. We do see that prices are pulling back a little bit. So you could expect another strong margin performance in Q3, but Q4 will be soft due to seasonality. So when we look at that and with the slow start in Q1, it still looks like the mid-25 margin target for the year with the potential for some upside is still where we feel comfortable.

Fair enough on that. I think we talked about the inventory levels. And overall, I guess there's no update you mentioned on the DLA contract. It's an open contract. And anything you could tell us in terms about the competitive nature or how many people are going forward or people that historically had this contract or other similar contracts before? I know you previously mentioned that you felt that you were in a good position given your good delivery schedule over the past.

Yes. So let's say the one potential negative about this proposed proposal for the sort of the next years is that it was no longer constructed as a small business set aside, which certainly gave us an advantage when we won this over 10 years ago. We don't know how many people have been on it. We would imagine it's somewhere in the 5 to 10 range. We don't think it's more than 10, but we certainly don't think it's less than 5 -- we do have a very high level of success in terms of on-time performance and so forth and all the metrics relative to the existing 9-plus years now that we've served them. But what we don't know is who the other bidders are, what types of activities they may or may not have of serving the DLA and other contract needs. So we're just always being cautious. We think at this point, they're pretty far down the road. But we don't know, frankly, when they're going to make a decision. There's not like a shot clock and it's going to happen on a particular date in time. But we obviously will make an announcement once we find out who wins the contract.

Your next question is coming from Austin Moeller from Canaccord.

Just my first question here, you mentioned on the call that some of the price increase was impacted by tariffs. So could you just indicate, is that primarily affecting refrigerants that are being imported, which is benefiting prices for reclaim sourced in the United States? And then if there were any changes to tariffs, what would you expect the impact to be on pricing?

Yes. So a great question. And you're right, the tariffs and its impact would be on imported refrigerants, but also imported steel. And so -- and then we would supply for -- we would have a supplier of cylinders that's domestic, but we wouldn't always understand or know directly where the steel is coming from. So there's volatility at times in what the steel prices are. Also, what we would have seen, and I'm sure you've all observed is high rates from product that could be coming from China. There were higher rates in product that will be coming from India, which would be tied to refrigerants as well. There's been some element of stability over the last number of months. So we would have had, let's say, higher peaks of particularly those 2 countries tariffs that have come down. So we're attributing some of the price increase overall and then a little bit of retraction to some of the up and down on the tariff side. But you're also correct in your assumption that because recovered refrigerants is all U.S. sourced, there is no impact to tariffs and so on down the line. So we generally do get a benefit with price increases on the profitability of recovered gas. And so if you put it in the context, just trying to use a very simple example, if the price is $6, maybe on a recovered basis, we could be making close to $3 a pound when we sell a reclaim pound. But when the price is $8, we could be making maybe $4. So for the same effort and so on down the line, we're getting an extra $1 per unit of profit and that incremental dollar generally will fall to the operating line because our SG&A doesn't move up and down as the price of refrigerants moves up and down.

Okay. And then just on the DLA contract, when it's renegotiated, do you expect that the volume of industrial gases and refrigerants that they procure may go up, and so there may be a premium on that contract relative to the last time you negotiated it?

We wouldn't know that, to be honest. We would kind of expect -- so we had, I guess, it was 2 years ago, a great surge in demand on the contract, but it only lasted for about 12 months. The contract, let's say, volumes have been a little higher on the last number of years compared to the early years. I think part of it is about marketing that we've engaged with the DLA on to try to get more participants buying through the contract versus around the contract. But at the moment, we really don't know a whole lot of what the new contract is exactly going to look like, but we wouldn't necessarily anticipate higher volumes once the award comes out. But we'll give updates on all that once we hear who gets awarded the contract.

Thank you. That concludes our Q&A session. I'll now hand the conference back to Brian Coleman for closing remarks. Please go ahead.

Thank you, operator. I'd like to thank our employees for their continued support in what was really a tough quarter based on the conversation we've had this evening and the dedication to our business and both for our long-term shareholders and those that recently joined us for their support as well. We look forward to speaking with you after the third quarter results. Have a great night, everybody.

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