Hudson Technologies, Inc. (HDSN) Q2 2026 Earnings Report, Transcript and Summary

Greetings. Welcome to the Hudson Technologies Second Quarter 2026 Earnings Call. [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. You may begin.

Thank you. Good evening, and welcome to our conference call to discuss Hudson Technologies' financial results for the second quarter of 2026. On the call today are Ken Gaglione, President and Chief Executive Officer; and Brian Bertaux, Chief Financial Officer. I'll now take a 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 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 business 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 our actual results to differ materially. With that, we will now turn the call over to Ken Gaglione. Please go ahead, Ken.

Hey. Good evening, and thank you for joining us to discuss our second quarter results. The refrigerant selling season is underway, and I am generally pleased with our strong second quarter results against some rather challenging market and business conditions. Our priority remains long-term value creation, including our focus on operational excellence through the improvement of our core capabilities and longer-term efforts to create less cyclical, more diversified sources of revenue with the goal of reducing our dependency on spot refrigerant pricing. We continued to execute on that vision in the second quarter by investing in the talent and technology we need to accomplish these goals with the backdrop of weaker-than-expected HFC market prices, illustrating the importance of shifting our business model to have less exposure to variations in pricing dynamics. We're in an inflationary economy, and this tends to favor repair versus replacement of HVAC units and resulting demand for aftermarket refrigerants, but this is counter to what we saw in the quarter. There are several possible reasons for softness in HFC prices. At this point, we can only speculate that a few factors are contributing to the softness, including recent information we've seen about illegally imported refrigerants coming across the southern border, excess channel inventory or simply that while there have been short bursts of higher temperatures this summer, we haven't really seen a prolonged period of hot weather for a long enough period of time. The industry is acting on the question of illegal imports and we're optimistic the situation will improve in the long run. Additionally, the forecasted El Niño effect and accompanying warmer weather may also benefit our business as we round out the selling season. For the quarter, sales revenue was up 8%, driven by a strong 12% increase in sales volume, while our increase in reclamation volume again demonstrates our customers' strong commitment to refrigerant life cycle management and Hudson's expanding network of recovered refrigerant sources. These positive results were offset by the HFC refrigerant pricing and higher costs related to our investments, both of which impacted net income. Brian will provide more detail on our financial results in a moment. Turning to our business with the DLA. Orders during the second quarter were in line with our annual run rate for the DLA contract. The 5-year annual contract that was awarded to us and then rescinded due to a competitor's challenge is still in review. During the quarter, we were awarded a bridge contract, which keeps the current contract terms and conditions intact for 4 months through November 29, 2026, with 2 additional 3-month extensions through May of 2027. We are very confident this open matter will be resolved shortly. Next, we often get questions about Hudson's activity in the rapidly expanding data center market. Most of what we read and hear about data centers today is focused on the immediate build opportunity for direct and indirect cooling and the role traditional HVAC systems play. These are generally first-fill opportunities for new systems dominated by virgin refrigerants sold to OEMs or through OEM channels. Hudson's business is centered on specialized high-speed recovery and legacy reclaimed refrigerant supply to the aftermarket. Today, we have a nascent business with data centers, which is not a meaningful portion of our business today, but we expect this segment to be a much larger opportunity in 3 to 5 years as data center HVAC systems begin to need optimization, resupply or decommissioning. We will continue to look for ways to optimize our presence in the data center market. This expected future demand is yet another reason for investment today in operational readiness. First, as I noted earlier, recovered refrigerants are an important feedstock for operations. During the quarter, we saw continued growth in recovered refrigerant volume as we leverage our past investments and acquisitions that expanded our recovery ability and more recently, the successful pilot of aftermarket small recovery trucks, or SRT, in the New York City area that further facilitates our life cycle refrigerant management program by focusing on high-density, lower-volume recoveries that our legacy service operations did not address. The solution is high speed, EPA compliant and allows our contractor partners to focus on other value-added revenue-generating activities. By focusing on the contractor, we are not only expanding our access to recovered refrigerant, but also helping to increase overall industry recovery rates by simplifying the recovery and reward transaction so it is effortless as possible while still complying with EPA reporting requirements. Second, when we receive recovered refrigerant from contractors for reclamation, the cylinders can contain one refrigerant or may be mixed with multiple refrigerants. Hudson has 2 of the 7 reclamation facilities in this country that can separate mixed refrigerants from a cylinder using fractional distillation. This enables the conversion of recovered refrigerant feedstock into salable products with greater efficiency compared to simple distillation or other methods. While fractional distillation is not new, the proprietary way we accomplish the separation is one of Hudson's core competencies. We're building on that expertise. And during the quarter, we announced our intent to partner with Icorium, an NSF Innovation Corps start-up company based in Lawrence, Kansas, to scale their patented extractive distillation technology to increase our ability to separate complicated next-generation azeotropes and HFO refrigerant blends in one of the most efficient ways possible. Unlocking this traditionally difficult separation capability allows Hudson to extract the most refrigerant from every pound of recovered gas, permitting faster transition of feedstock into working capital and producing a sustainable competitive advantage in the process. The intended partnership with Icorium is just one component of Hudson's advanced operations directive, which we expect will enable the company to expand both capability and capacity ahead of the next EPA phase down and before expected increase in that data center-related demand. As announced previously, our facility in Illinois experienced extensive damage from a tornado on June 11, causing us to temporarily idle operations while the plant was secured. The good news is that the damage was mostly related to the building structure and no one was injured with the storm removing the roof and the equipment attached to it and water damage to the interior of the facility. While the plant was without power for approximately 1 week, there was no detectable damage to the separation columns or to our product inventory. Facility was completely out of service for approximately 3 weeks with no loss of inventory and is now fully functioning while major repairs are underway. Expenses related to the full restoration will be covered by insurance and are not reflected in our second quarter P&L. Now I'll turn the call over to Brian. Please go ahead, Brian.

Thank you, Ken, and good evening, everybody. I will now review our second quarter 2026 financial results with a comparison to the second quarter of 2025. Hudson reported $78.3 million in revenue, an increase of 8%. We posted a strong 12% growth in sales volume, which was partially offset by a 6% decline in average refrigerant sales price. During the 2025 quarter, essentially all refrigerant market prices rose as a result of supply chain constraints amid the EPA-mandated transition to HFO refrigerants. Gross margin was 26% compared to 31% in the 2025 quarter. The drivers to the gross margin decline were twofold. First, as previously noted, HFO supply chain constraints caused a temporary positive impact on all refrigerant pricing in the 2025 quarter. This pricing comparison resulted in a 232 basis point reduction in gross margin for the 2026 quarter. Second, we experienced higher operating expenses, primarily due to increased fuel costs in the quarter related to the conflict in the Middle East and the corresponding impact to freight costs. SG&A expenses were $12.4 million in the 2026 quarter, an increase of $3.1 million. The drivers to the increased SG&A costs were also twofold. We incurred costs related to the optimization of the recently launched ERP system as well as legal expenses incurred related to the reaward of our DLA contract. Second, we increased staffing and consulting resources that reflect our newly reinvigorated focus on longer-term initiatives to increase shareholder value, as Ken noted. Net interest was flat in the 2026 quarter compared to net interest income of $700,000 last year, reflecting a lower cash balance on our unlevered balance sheet. Hudson recorded net income of $4.9 million or $0.12 per diluted share, compared to net income of $10.2 million or $0.23 per diluted share in the 2025 quarter. The decline in net income reflects the combination of a continued trough in HFC refrigerant market pricing, inflationary pressures, primarily in freight, our ERP optimization as well as legal and consulting support to continue our reinvigorated commitment to investing in the future for long-term shareholder value creation. The company continues to have an unlevered balance sheet, ending the quarter with $26 million in cash and no debt, reflecting a sequential $6 million increase in cash versus our cash position at March 31, 2026. Our capital allocation strategy remains focused on organic and strategic growth as well as opportunistic share repurchases. We did not purchase any shares of the company's stock during the 2026 quarter, reflecting our near-term cash management strategy. We have purchased $2.5 million in shares thus far in 2026. At this time, with the trough in refrigerant market pricing and inflationary pressure expected to continue, we are revising our full year 2026 gross margin target from mid-20% to low-to-mid-20%. In addition, as we continue to invest resources for long-term shareholder value creation, we expect second half SG&A expenses to continue to show increases over 2025, but to a lesser extent than the first half. I will now turn the call back over to Ken.

Thank you, Brian. We can't avoid the reality of soft market prices for HFCs and the impact it has on our profitability. But despite this headwind, we had a very strong quarter, focusing on meeting the growing service and refrigerant needs of our customers. The industry will continue to pursue the development and use of new lower GWP refrigerants, and we believe Hudson has the expertise, facilities and distribution network to bridge the transition now and in the future. To secure our vision, we are making the incremental investments needed to make Hudson a more flexible, efficient competitor and ultimately, the preferred source for diverse refrigerant life cycle management solutions. Thank you for your attention. Operator, we'll now open the call to questions.

[Operator Instructions] First question comes from Jason Tilchen with Canaccord Genuity.

Maybe one for Ken to start. Just wondering if you could maybe share some of the -- share an update on how the ERP implementation progressed during the quarter. Maybe what are some of the early learnings as you continue to roll that out? And related to that, what may be the specific magnitude of the costs -- those expenses for the optimization that were incurred during Q2, when those may start to roll off as well?

Jason, thanks for the question. Yes, the ERP system optimization, I think, has gone better in the second quarter. It's definitely been a process. And I think that the cost -- magnitude of the cost, yes, we've spent a lot to optimize and get things sorted out. But we're seeing that cost is going to be reduced in the second half. It's not going to continue at the same rate. So there's over $1 million in the first half that we've invested in ERP optimization, and it will be lower in the second half.

Great. And then in the prepared remarks, you mentioned that the dynamic you saw with pricing in the quarter didn't necessarily match the sort of typical dynamic you would see in an inflationary economy. You mentioned some of those potential causes of the softness in pricing. Just wondering what you think is needed in order to maybe drive more of a normalization in that behavior and any other sort of thoughts that you have on the operating environment would be helpful.

Yes, it's definitely not a typical increase that we would have seen or a typical firming that we would have seen going into the season on HFCs. What it's telling us is that I think, in my opinion, there's excess channel inventory on HFCs that are keeping prices suppressed. I also think, and this is sort of new information, that there is more of an impact on illegal refrigerants coming in than we might have expected previously. So that's also having a dampening effect. What will impact the rest of the season is going to be prolonged heat, and I think we are seeing some of that. I think it would also help if some of the inflationary pressures were reduced, but I'm not really forecasting that. I think that's going to stay the same for the rest of the year.

Okay. Great. And then last quick one for me is, maybe one for Brian, just could you provide a little bit more color on the specifics around some of those -- some of the areas where from an operating perspective, where you're seeing those inflationary pressures and to the magnitude that you expect them to persist in the second half?

Yes. So it's across several different areas, but primarily in freight. So freight is where we saw the biggest increase. And unfortunately, in this dynamic, we can typically -- in the past, you could always pass along freight in the pricing. But with this trough in HFC pricing, that didn't happen. So with that increase in freight, that was certainly a contributor to the margin decline.

The next question comes from Gerry Sweeney with ROTH Capital.

I had a question about the distillation technology. Obviously, it sounds like it potentially helps you separate mixed gas or dirty gas and gas comes back in all shapes, forms and fashions as that's related to the quality. Do you have any idea of how much more gas this could potentially open up for you for reclaim? Because my understanding was some of the mixed gas -- it was too mixed that made the fractional distillation very challenging or you had to run it through multiple times to sort of get to a point where you need to use it.

Right. You hit it exactly right, Gerry. What makes it inefficient is multiple passes through a very tall column to separate some of these more complicated blends or highly contaminated gases, correct? There are gases that we are unable to -- or components that we are unable to do effectively with fractional distillation that we will be able to effectively do tomorrow with extractive. That's a key unlock for us. And we'll be able to share more detail about what that is and what the volume is going forward. But that is absolutely a critical component for us. The second part of the story is this also unlocks our ability to move potentially into adjacencies that we would not have been able to access otherwise with fractional distillation.

What would be some of those adjacencies if you have the ability to?

Yes. I'm not going to get into it. But in broad strokes, right, this is a much more sensitive type of separation. So it gets us to a higher purity level and it's a more sensitive type of distillation. So that puts us into a space where higher purity materials for other market segments in other areas, that's where this is going to come into play.

And this may be too early to ask, but the economics behind the cost, is it as efficient as the current system? Or how should we think about it from that perspective?

I don't think it's -- sorry, go ahead, Gerry.

I wasn't sure if there would be an advantage. It provided more of an advantage on a cost basis.

I think it is early to say. But right now, we're estimating that it's going to be mostly useful for those complicated, highly contaminated blends. But as we get to scale down the road, then it should be on a -- it should be a cost equivalent basis as fractional.

[Operator Instructions] The next question comes from Josh Nichols with B. Riley Securities.

This is Matthew on for Josh. So in terms of pricing, you're running down about like 6% against last year's peak. I'm wondering, as those comps ease through the back half, do you see current price levels holding? And would you call the trend stabilizing or still under pressure?

We would see them stabilizing. So there was just a small uptick in 410A in Q2 versus Q1, very small, and we think it's stabilizing, just call it in the $6 area. $6 per pound.

Got it. And how much of a factor is the illegal import pressure on pricing? Like, do you expect that to ease with enforcement? How persistent is that? And, yes, if you could quantify that a little bit in terms of the impact.

It's hard to quantify, as you might expect, but I think it's a bigger factor than we would have thought at the beginning of the year. But we are working with industry partners and our consortia of interested parties here to understand what the magnitude is. But it is in the millions of pounds is what I've come to understand. So this is a significant issue for the industry, and it is being addressed. What's going to be the second half outlook? I'm optimistic, but I can't say with any certainty that this is going to be settled by the end of the year.

Got it. That was helpful. I guess last question for me is just more on the Icorium technology. Just wondering what it does for your yield in terms of how much more recovered product you can convert to salable versus conventional fractional distillation.

Yes. And I'll say this. I think it's a very exciting technology, but it is a commercialization. So we are taking something. We've done a lot of work on this over the past couple of years. I think that there's a huge opportunity here to separate out, as I said earlier, a component that we've not yet been able to separate effectively with fractional distillation, and we can do that with extractive. That's been demonstrated. So that alone is going to justify the investment. And then the improvement in yield on regular -- let's say, regular cross gases, that's yet to be determined. But we are expecting this to be quite significant.

The next question is coming from Ryan Sigdahl with Craig-Hallum.

I will be the first to congratulate you guys on getting the 5-year, $210 million Defense Logistics Agency. It hit just now. So congratulations. My question is, so -- you mentioned increased staffing as you focus on some of these longer-term initiatives. You talked about service in the past, et cetera. But I guess my inclination is you must be feeling pretty good about the pipeline of opportunities given you're bringing on fixed costs ahead of that. But can you give us an update kind of what you're working on, your confidence level and any other details there?

Yes, absolutely. And thanks, Ryan. Appreciate the notice. For everyone's benefit, what came across the wire as we were speaking is the DLA reaward has been reawarded. So that matter is now behind us. It's been a 7-month stretch and we're very pleased that DLA has recognized and validated our commitment to their success. So thanks, Ryan. Yes. When it comes to the investment, right, there's 2 or 3 major pillars here. And I'm going to include the extractive distillation in this because they're all linked together. But our predictive modeling business, and that's a nascent service area, has actually done quite well. We have won 4 contracts this year so far for predictive servicing on multiple chillers. We're focusing that activity and to support that activity, we need to have improved skill sets and new skill sets in the organization. So that's what we're really focusing on is the predictive modeling services as well as the small truck recovery program, where we've added staff and we're adding locations to support that. That's already revenue positive and we are excited by the pilot work that's been done in the New York City area. And we're going to continue that in other areas of the country, other major metropolitan areas with the rollout continuing for the rest of the year. So those are the areas where we're supporting staffing as well as regular services business. We're at capacity with our services group. We have done some data center work with our regular services group this year, and that's very exciting. I don't talk too much about it, but it's a great growth area for us as that goes forward. And as I mentioned in my comments, we're going to need the service team to support it. So those are the areas that we've been investing in.

And I'll even add to that. We have competitors on the line. So we are investing with consultants and such for things that we can't speak to now, but that we feel will have very good impact on shareholder value in the future. So one day in the near future, we'll be looking forward to speaking to those.

Good teaser for your competitors on the line, Brian, to look out behind their back. Maybe just one other one. You guys have done a nice job of outperforming growing volume. I can't help, but given the decrement to gross margin. Are you guys emphasizing volume over price and margin? And are you able to do that in the market if you wanted to?

Yes, it's a good question. So we are balancing this. So we actually pulled back volume when the market prices started to erode further back in June. We made a strategic decision to start focusing on higher-margin product mix. So we did give up some revenue on top line just to look at higher-margin product sales. So we do have that ability, but it is a balancing act. And it was impaired somewhat in June by the plant being down. Some of our R-22 sales could not be executed in June as a result of the plant being down. So those either got pushed into the next quarter -- into this quarter or didn't happen at all. So it is a balancing act, but we are able to fine-tune that as we go forward.

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

Okay. Thank you, operator. And thank you, everyone, for your interest in Hudson Technologies, particularly this quarter. I want to thank again our employees for their continued support and dedication to our business and both our long-term shareholders and those that recently joined us for their support during an exciting period of the company's evolution. This was a tough quarter. We had a lot of headwinds with the plant and the accident. But again, our employees pulled us through, and I am extremely proud of the work that's been done to grow sales, grow volume in that environment. So thank you, everyone. We look forward to speaking to you after the third quarter results. Have a good night.

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