Hudson Technologies, Inc. Price & Performance (HDSN)

Thank you. Good evening, and welcome to our conference call to discuss Hudson Tech Technology's financial results for the fourth quarter and year end twenty twenty four. On the call today are Brian Coleman, President and Chief Executive Officer and Brian Berteau, Hudson's CFO Hudson. 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 [indiscernible] are not guarantees of 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 ks and other SEC 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'll turn the call over to Brian Coleman. Please go ahead, Brian.

Good evening, and thank you for joining us. Our fourth quarter unfolded largely as expected. Closing out what was a challenging year. As many of you know, our fourth quarter has historically been characterized by seasonally slower sales activity compared to our nine month selling season this year was no exception. Brian Berthau will provide details about financial results a little later in the call, but at a high level, full year revenue of full year revenue of $237,000,000 was slightly below our revised target of $240,000,000 we achieved a revised full year gross margin target of 28%. We further strengthened our unlevered balance sheet as evidenced by our cash position of $70,000,000 and no debt at 12/31/2024. And after establishing our stock repurchase program during the third quarter, we repurchased a total of $8,100,000 of common stock in 2024. As we previously discussed, our 2024 cooling season was impacted by decreased pricing for certain refrigerants and our full year results reflect that pricing dynamic as well as lower revenue from our DLA contract as compared to 2023. As we reported, HSE pricing in 2024 declined up to 45% throughout the sales season and we ended the year with no price improvement.

However, our actual sales price decline was not as severe as the market chemical plants, manufacturing facilities among others. HSE pricing at the close of 2024 was just under $6 per pound, and remains at this price point as we kick off 2025. As I mentioned last quarter, when we discussed HOC price we're generally focused on the price of 70% of the total aftermarket demand for HFCs. For the moment, there is no material demand for refrigerants as we've not entered the [indiscernible] Certainly, when we report our first quarter results in early May, we'll have a better understanding of any possible supply demand imbalance As we've previously noted, we have a concern that upstream inventories may still be at a high level. For the moment, we see the 2025 gross margin ranging from mid to upper 20s and certainly on price alone, we will have a difficult comparison to the first quarter of twenty twenty four in 2025. Ultimately, we will know the 2024 inventory data from the EPA but that will likely not be available until the third quarter of this year. To give some context around revenue from the DLA contract, During the full year 2024, we recognized $36,000,000 in revenue from the contract which was slightly ahead of where we expected normal purchasing levels to be and we anticipate 2025 will trend to normal purchasing levels.

During 2023, we saw a significantly increased purchase activity of approximately $20,000,000 in revenue through the DLA contract than in any previous year. And we anticipated 2024 to return DLA purchasing level. As we previously discussed, do not control market pricing for HFC refrigerants. But we are fortunate to have a diverse customer base that allows us to perform better than market. We will always focus on what we control. Namely ensuring that our customers have the right refrigerants where and when they need them, and promoting recovery and reclamation activities as our industry transitions to lower GDP equipment and refrigerants. Our established distribution network and longstanding supplier and customer relationships position us well to efficiently meet the market demand for all types of refrigerants And we remain focused on expanding our customer base and market reach. Importantly, our long term view is that the current phase down of HSE refrigerants create a significant opportunity for our The installed base of HSE equipment will be operable for twenty plus years to come. And as the supply of virgin HSCs become limited, reclaim HSCs will be needed to fill the anticipated supply demand gap. Additionally, there have been regulatory changes at both federal and state levels to promote and require the use of reclaimed refrigerants. [indiscernible] On the federal level, in September, the EPA published its final refrigerant management rule, which among other directives mandates the use of reclaimed refrigerants for servicing in certain sectors of the market beginning in 2029 and thereby banning the use of newly manufactured or virgin refrigerants for servicing.

This is the first time our industry has seen a federal requirement for the mandatory use of reclaimed refrigerants in certain sectors and we believe this represents a strong step forward in the drive toward broader use of reclaimed refrigerants. Recently, there's also been promising legislation act active among the states. Led by California, which has implemented laws to prohibit the sale and use of certain newly manufactured HIGRP HFCs as mandated the use of reclaimed refrigerants in their place. At the start of 2025, California also began [indiscernible] for the use of reclaimed refrigerants in state government facilities thereby prohibiting the use of virgin refrigerants. New York has a legislation somewhat similar to California and Washington State has legislation pending with more states expected to follow. We believe that these mandates create an additional opportunity for contractors to follow the law and not intentionally vent refrigerants. We believe that contractors will recognize that venting is no longer if they plan to serve their customer needs associated with these reclaim mandates. It should be noted that our overall reclaim activity increased by 18% in 2024. We are intent on maximizing our recovery and reclamation capabilities and our strategic acquisition of certain assets of USA Refrigerants in June of twenty twenty four strengthened our capabilities in this area.

Refrigerant recovery is integral to the reclamation process. So our addition of USA and its recovery network combined with their ongoing efforts to promote recovery in the field are strengthening our ability to source recovered refrigerants. In terms of our efforts in the field, Hudson pays for recovered refrigerant, and we focused on promoting best practices for recovery of refrigerants technician training, with an emphasis on the existing mandates for the use of Refrigerants, We believe that informing technicians about these mandates helps reinforce the message that the practice of venting refrigerants does not make sense for them either financially [indiscernible] We communicate this message by speaking at cooling industry events and by addressing technician training sessions hosted by our customers. During the fourth quarter, Hudson attended and or spoke at Service World Expo, Greenbuild and ACCA Hudson others. As we move toward the heart of the cooling season for 2025, we believe we are well positioned to grow our role as a leading provider of all types of refrigerants particularly reclaimed refrigerants, by ensuring we are positioned to capitalize on Refrigerant sales servicing opportunities and the reclamation needs of our customer base. We remain focused on balancing our commitment to driving a smooth transition for our customers through the current refrigerant phase down [indiscernible] while promoting our industry's continuing evolution towards lower GDP equipment, and refrigerants.

Now I'll turn the call over to Brian Bertolt, for the review of our fourth quarter financial results. Go ahead, Brian. Thank you, Brian, and good evening, everybody. I will now review our fourth quarter and full year 2024 financial results with a comparison to our 2023 results. Hudson recorded $34,600,000 in revenue in twenty twenty four fourth quarter, a 23% decrease compared to the twenty twenty three quarter, The decrease was primarily related to lower refrigerant market prices and lower revenue from the company's DLA contract. Fourth quarter gross margin was 17% compared to 31% in the twenty twenty three quarter due to lower refrigerant market prices. The twenty twenty four fourth quarter sequential change in gross margin was consistent with prior years reflecting lower seasonal sales volume.

Our fourth quarter SG and A $8,000,000 came in lower than the $8,500,000 recognized in the twenty twenty three quarter. We recorded an operating loss of $3,200,000 in the twenty twenty four quarter compared to operating income of $4,700,000 in the twenty twenty three quarter. The company reported a net loss of $2,600,000 or a loss of $0.06 per basic and diluted share in the twenty twenty four quarter compared to net income of $3,900,000 or $0.09 per basic and $0.08 per diluted share in the twenty twenty three quarter. Now turning to the full year.

Hudson recorded $237,100,000 in revenue in 2024 a decrease of 18% compared to 2023. The decrease was primarily related to low refrigerant market prices and lower revenue from the company's DLA contract. Our refrigerant sales volume increased lately over 2023. However, this was more than offset by a steady decline throughout the year and market prices for for HFC refrigerants. DLA revenue in 2023 was higher than normal due to certain surge purchases of approximately $20,000,000 The elevated DLE activity in 2023 made for a tough comp 2024. 2024 gross margin was 28% compared to thirty nine percent twenty twenty three, Reflecting lower refrigerant market prices throughout 2024, resulting in margin compression. 2024 SG and A was $33,000,000 compared to $30,500,000 in 2023. The increased 2024 SG and A spend includes approximately in costs associated with our 2024 position of USA Refrigerants and IT related expenses. In total, we spent approximately $1,000,000 in 2024 pursuing strategic opportunities and we expect to continue this level of activity on an annual basis for the foreseeable future. The company recorded operating income of $29,300,000 in 2024 compared to $78,200,000 in 2023 reflecting the previously noted decline in refrigerant prices, and tough 2023 DLA comp.

We recognized $500,000 in net interest income in 2024 which was a significant shift from the $8,400,000 of net interest recognized in 2023. Our 2024 earnings before taxes included $2,300,000 of non recurring income primarily related to a favorable outstanding litigation settlement. Hudson recorded net income of $24,400,000 or $0.54 per basic and $0.52 per diluted share in 2024. Compared to net income of $52,200,000 or $1.15 per basic and $1.1 per diluted share in 2023. The company strengthens its its unlevered balance sheet ending 2024 with $70,000,000 in cash and no debt. Our capital allocation strategy remains focused on organic and strategic growth as well as share repurchases we were pleased with the execution of our capital allocation strategy in 2024 which included the acquisition of USA Refrigerants as well as $8,000,000 in share repurchases. I'll now turn the call back over to Brian. Thank you, Brian. As we begin 2025, remain committed to our long term outlook that the refrigeration and cooling industry [indiscernible] represents a tremendous growth opportunity for Hudson. Our progress might move intermittently at times, due to factors we do not control, but our management team is very good at executing with particular emphasis on purchasing more recovered refrigerants which yield higher gross profits and margins when sold as compared to the distribution of newly manufactured refrigerants.

Operator, we'll now open the call to questions. Thank you. The floor is now open for questions. And the first question today is coming from Jerry Sweeney from ROTH Capital. Jerry, your line is live. Please go ahead. Is 1 and which is 2? I will let you decide. All right. Thank you. I was going to bring that up. But yes.

We'll go in order of age. So just curious as to how much visibility you have into the channel and will you be able to see maybe some of the destocking upstream as it develops or if you Hudson some the ability to talk to some of the clients and understand where they are in that process. [indiscernible] what we suspect, we do expect inventory totals when reported for 2024 will be lower than 2023 and we think it a good bit lower because of the 30% reduction in the allowances in the twenty four year compared to the 'twenty three year, believing that the overall demand would been very similar in 2024 to 2023. Obviously, when the data comes out, we'll confirm that. So we think there's been some decline in the upstream inventory balances, but it's still we think fairly significant And so we're being cautious about '25 right now. And sort of setting the stage that obviously it's still well before the cooling Hudson. But prices haven't changed. They may, but we probably won't see that until we start to get into April and certainly by early May when we report the first quarter results. Got it.

With that in mind and looking at your inventory at inventories at the close of the year, I think there were $96,000,000 You did mention something about inventories at the end. I didn't catch all that, but So this is redundant, I apologize. But looking at your inventories around $96,000,000 Are you in good shape for that or will you continue to go out and maybe purchase or be more aggressive with gas or just play normal. [indiscernible] the channel is going to clear and this could be a good opportunity to gain inventory, especially with your balance sheet. Just wanted to see how you think of that Historically, we just manage our inventory levels with the intent of being able to sell the inventory within the next season. We generally don't carry even a full year's worth of inventory. So the dollars you see in inventory and how the inventory dollars coming down are not necessarily volume, but price particularly that we're trying to reload the inventory at lower prices. Now we thought probably when we reported Q2, that our cost basis was stabilizing relative to the sale price, but unfortunately the sale price declined further from Q2 into Q3 So we do think going forward, there'll be some more room to lower dollars in inventory just on price alone.

Go through the 2025 sales season.

I think I got that. Let me have to follow-up that later, but I think I got that. Okay. Got it. And final question, I'm not sure if you'll answer this, but I'm going to throw it out there. Obviously, reclaim is part of the business, distribution is I think Virgin Gas still remains a portion of your business. Just curious on access to gas on that front and what percentage of revenue or of that or how important does that play into Just general revenue and business operations and leveraging assets. Yes.

I mean, HFC still are dominated by virgin supply.

And then therefore, that would be true for Hudson. Certainly because we're a reclamer, and able to access reclaimed HFCs, our percentage might be different than others, but still HFCs are single digits relative to the overall HFC demand.

Got it. Okay. Got it. I'll jump back in queue. I appreciate it. Thank you. Thank you. Your next question is coming from Ryan Sigdahl from Craig Hallum. Ryan, your line is live. Please go ahead. Hey, good afternoon, Brian, Brian. I want to start with the DLA contract. So one, have you seen any impact from whether it be Trump and kind of the administration change, the Doge cuts that are happening? And then as you look at kind of the new contract that's up for renewal and rebid right now, so anything change from a timing standpoint still expect a decision this summer. And then as far as the bid process goes, I guess anything significant that's changed from your expectation of what Hudson's margins can be with that renewal?

Yes. So back to the contract, there's several hundred line items And they're all really consumable line items. There is no guaranteed demand relative to the contract. That's why it's difficult to estimate what an annual revenue might be. But again, we think it's going to be in that low to mid-30s for 2025. We don't see any administrative activities that's going to negatively or at the moment positively improve that outlook relative to what we think we'll achieve in 2025 related to the contract. As it relates to the successor contract The bid proposals went in, but went in later than the original timeline. So we think it would be more likely the back half and a later part of 2025 when we hear the results of that process and who will be awarded with the next contract.

And then just as you think about tariffs, trade wars, do you think that'll have any impact? Are you seeing any impacts from usage of allocations for 2025 of potentially pulling those early into the year or maybe even pushing them late? Well, as it relates to refrigerants, we already had very, very large tariffs on the Chinese produced HFC refrigerants and pretty much almost every class whether they be individual components or blended products. We're going to see more of an impact a direct impact would be on some steel tariffs And if you think about some of the tariffs that are being put in place on steel, that could impact the cost of cylinders. And we have a large reusable cylinder fleet so we don't need to really buy a lot of reusable cylinders just kind of fill in as end of life comes out of that fleet. But as it relates to disposable cylinders, which go towards the smaller sized refrigerants for mainly residential, light commercial, we think we're going to see some price increases on the cylinders. And we're expecting to be able to pass those price increases through the channel because we would expect most of the other suppliers of refrigerants to that channel likely do the same.

Great. Thank you. Your next question is coming from Josh Nichols from B. Riley.

Josh, your line is live. Please go ahead. Yes. Thanks for taking my question. Just kind of curious with like the switch over for new OEM equipment to this hybrid refrigerants Just still early days, I mean some other peers have said that you may not see the impact until like 2Q or whatnot. But I'm just curious your thoughts on how that may impact inventory levels or potentially like the pace of destocking for 2025?

So the newer equipment and the equipment transition rule is kicking in this year. The products that would have been stockpiled really are related to the HFC legacy systems. So products associated with either the components to 410A or 410A as an example.

Right now, there is market disruption as it relates to the transitioning to the lower GDP systems, mainly related to current demand and supply, but likely as it relates with any transition, you run into that in the early days and then quickly the industry catches up with availability on both the equipment and on the refrigerant side. So there is some chunkiness right now as the lower GOP equipment is being launched.

Is definitely sell through of the legacy equipment. So we'll likely see a lot of for today units being sold in the twenty five year installed in the twenty five year. And all these different supply issues on the transition of the lower GDP equipment should clean themselves up over the next few months.

Thank you. And then Brian, I know that primary, of course, focused on reclamation, but you have you do also sell some like historically like virgin HFCs, lower margin granted Hudson like the reclamation side of the business. I think it's like 20% for Virgin. That something that you guys I guess, would still be doing much of? Or would you be able to do that for the new refrigerants as well? Because the pricing for the newer refrigerants going into OEM equipment is is presumed to be higher than HFCs given the transition that's going on? Or Or would you not really be impacted by that?

Well, we definitely technically can reclaim replacement refrigerants It probably though will be a while before you start to see any material amounts of because they have to be installed and then problems have to occur and so forth. Where the concern could be about what reclaim activity we could do or volumes is around some of these replacement low GOP refrigerants are under patent.

And because they are multi component, products, we want to make sure that we're not upsetting any relation to any patent rights and things like that. So those are things that will get worked out over the next number of years as these replacement systems get installed and eventually start to run into problems. But for the near term, we're pretty much going to see large volumes of HFCs coming back. We're discussed this evening strategies to grow our overall volume of recovered HFCs, we expect to continue to do that in 2025 and beyond.

Thanks. And then last question for me. I mean, we talked a lot about HFCs, but just some of the the older stuff like R-twenty two, as that continues to age out, have you seen any major shifts in terms of demand or pricing on that front or does that continue to hold pretty steady at a much higher price with relatively steady volumes?

Well, the volumes will decline slowly over time and have been really as reported through the EPA reclaim data. So you'll see that R-twenty two reclaim volumes on an annual basis continued that downward slope. And that downward slope is likely going to tie into how demand is declining as well. So for the most part, R22 using R22 as the reclaim proxy R22 is stable. And has been pretty stable relative to supply and demand. And really not influenced in the way that HFCs have been Understood. Thanks, Brian.

Thank you. Your next question is coming from Austin Mueller from Canaccord. Austin, your line is live. Please go ahead. Hi, good afternoon. So just my first question, do you have any up updates on potential overseas licensing opportunities of portable distillation equipment?

I'm sorry. Are you asking the question about Hudson licensing equipment?

Yes, or rather of customers overseas being able to use your licensed equipment?

So we have over the years a handful of relationships where we've worked with organizations that business and infrastructure and have licensed our equipment and our proprietary distillation know how. We're definitely looking to do more of that. We're spending a lot more time at the meeting of the parties for the Montreal Protocol. Listening to developing nations, trying to understand how we might help there. Almost always, we're going to look for a partner that already has an established business could make sense for us to try and license our technology, but nothing current in the recent months.

Okay. And just just a second question, do you think it's possible there could be changes to the production cap for HFCs allowed under the new Congress? Or do you think that the chemical manufacturers are more focused on transitioning to HFOs and Congress likely won't change anything?

Well, we focus mainly not so much the production, but consumption cap. And it's really that first fill that first sale inside The United States borders relative to the allowance system. There was to be a change to the allowances, that would have to be legislated. Congress would have to construct a bill and then it would have to pass the House and Senate and then obviously executed by the President. There's no to my knowledge, there's no members or anyone advocating for any changes to the existing AM Act. There was a congressional review process on the refrigerate management rule that was issued by the EPA September of this year, which in part included the mandates for the use of Reclaim. It doesn't look like that congressional review of that particular rulemaking is a priority for the current Congress. When we looked at the list from the House Majority Leader relative to the Congressional review projects or process, anything associated with the AMAC didn't appear to be a priority for them.

Great. That's very helpful. Thanks for the insight. Thank you. This does conclude today's question and answer session. I would now like to turn the floor back to management for closing remarks. 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 first quarter results. Have a good night everybody.

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