Q3 2023 Hudson Technologies Inc Earnings Call

Greetings welcome to the Hudson Technologies third quarter 20 twenty-three earnings call. At this time, all participants are in a listen only mode.

A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I will now turn the conference over to your host Jennifer <unk>.

You may begin.

Thank you good evening and welcome to our conference call to discuss.

Hudson Technology and financial resources opt for the third quarter 2023.

Call today are Brian, calling president and Chief Executive Officer, and not Christian C. F L.

May I 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 and address expectations opinions or predictions about the future are forward looking statements. Although they reflect our current expectations that are based on our on our best view of the industry and of our businesses and you see them today, they're not guarantee that future performance.

Please understand that these statements involve a number of risks and assumptions and since those elements can change in 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.

Factors that could cause our actual results to differ materially without the way I'll turn the call over to Brian Coleman go ahead, Brian.

Good evening and thank you for joining us.

He delivered solid third quarter results, which included continued profitability and strong cash flow to close out our traditional nine month cooling season.

That said as we expected on a comparative basis third quarter of 2023 revenue margin decreased relative to the significantly strong revenue margin performance achieved in 2022.

The primary driver for the comparative decrease with a 27% decline in the sales price for certain refrigerants when compared to the third quarter of 2022.

As we detailed previously throughout most of 2022, we saw a substantial sale price increases without a corresponding increase in inventory price.

Conversely, the 2000 twenty-three cruelly season was characterized both challenging pricing environment and lower sales volume for the nine months season.

Specifically for the nine month period, we saw a decline of approximately 17% in the sale price of certain refrigerants as compared to the first nine months of last year.

In addition, the late arrival of warmer weather too many parts of the U S, which impacted demand for certain refrigerants.

Slightly a packet volume unfavorably for this season.

Even with the significant pricing headwinds, we achieved our gross margin of 40%, which is slightly higher than our long term targeted gross margin levels.

Marches, where favorably impacted again this quarter similar to what we saw in the second quarter of this year from higher margin carpeting sales and from sales related to the deal a contract.

Without those additional contributions gross margins would've been closer to 38%.

As we mentioned last quarter were tracking towards the highest annual revenue from our delay contract.

From our vantage point, we remain comfortable with our long range gross margin target of 35%.

Our ability to consistently deliver strong profitable in operating cash flow.

Loud is too aggressively pay down our debt during the last several quarters and that progressed.

Progress culminated with the full repayment of our term loan during the quarter.

Notably, we're very pleased to achieve the full repayment will ahead of our March 2027 maturity date.

And we anticipate that the elimination of this that will enable us to further reduce our interest expense and improve our balance sheet.

As you know our industry is preparing for the unprecedented 40 per cent baseline reduction and Virgin HSE production and consumption allowances.

Which will be effective at the start of 2024.

We believe that the current Phasedown represents a significant opportunity for our business.

With the current installed base of HSE equipment, which is currently estimated 125 million units the aggressive reduction in Virginia, HSC production is expected to meaningful impact the supply landscape.

Creating enhanced demand for reclaim refrigerators overtime to fill what is anticipated to become a substantial gap between HFC supply and demand.

Additionally, the reclamation industry is positioned to benefit.

Is the regulatory environment around refrigerants, and cool new equipment becomes more stringent.

There are ongoing efforts on both the state and federal levels to require tracking and detailed reporting decided to keep track of refrigerants from.

From cradle to end of life as a means to deter the practice of dead thing and to encourage reclamation.

Many you have likely seen the E P. As rules issued in early October.

The first was the finalization of the technology transition rule.

And the agency also published along the way to propose refrigerant management rule.

We are encouraged by the bold initiatives that the E. P. A has taken around the proposed refrigerant manager rule.

Particularly those that outline potential mandates for the use of reclaim refrigerants by Oems for new systems, and the use of reclaim refrigerants and servicing activities.

These proposed initiatives will require a significant increase in reclaim volumes, particularly for higher G. P. H a sees such as for for a for 10 a.

I want to stress that the refrigerant management rule is a proposed rule, which is currently making its way through the commentary process.

But we are pleased with the aggressive stance set forth by the E. P. A.

It's encouraging to see a broader proposed regulatory focus addresses venting deterrence, which should also increase the pool the refrigerant that can be recovered.

It also promotes the adoption of lower G P cooling technology and the use of reclaim refrigerants.

Hudson has an advantage as the industry shifts because we've long hold it in a practitioner of the circular economy of refrigerant and proper Refrigerate management.

Importantly, our technology is agnostic.

We've been recovering reclaiming a refresher it's since the early 19 nineties and our technology works with any and all types of refrigerate.

From legacy Cfc's, and Hse's to today's hfc's into future <unk>.

Our operational model can essentially provide a closed loop and which refrigerate is sold into the market for new equipment or for servicing cooling systems and later when services required or the system reaches end of life. The gas has recovered and returned the Hudson for reclamation without any mission to.

The atmosphere.

So we believe that we are uniquely positioned with our proprietary reclamation technology as.

As well as our system optimization and conversion services to grow our leadership role and the shift a lower G P refrigerants and cooling technologies.

Longer term, we believe industry stakeholders will increasingly embraced the environmental benefits of using reclaim refrigerate, which is nearly a zero G P gas.

Our ability to reclaim refrigerant is dependent on recovering refrigerate.

And we have focused on working with customers who share our commitment to the circuit leucotomy for refrigerants.

We have also been very active at industry forums and conferences promoting our vision for the adoption of sustainable and responsible refrigerant management among our industry partners.

Recent events and discussions that we have attended include the green build confidence.

The Allied Air Conference and several state plumbing heating cooling contractors Association meetings.

In July Hudson's Emerald Refrigerate.

Reclaim refrigerant bread was named top product of 2023 by environment plus energy leader.

The rewards program that recognizes excellence and products and projects that deliver significant energy and environmental benefits.

We also recognize the importance of participating in global efforts to raise awareness and accelerate the global transition to efficient and climate friendly cooling alternatives.

In early October Hudson announced that we joined the cool coalition.

A global multi stakeholder network assembled by the United Nations Environment program that connects a wide range of key participants from government cities International organizations businesses Finance Academia and civil society groups to facilitate knowledge exchange advocacy.

C enjoying action towards climate friendly cooling alternatives.

And I just returned from Nairobi, where last week Hudson participated at the 35th meeting of the parties of the Montreal protocol on substances that deplete the ozone layer.

We're pleased to have these opportunities to share our expertise and interact with other stakeholders glue.

Global level.

As we move through the balance of 2023.

We remain focused on continuing to be a reliable resource to our customers by providing sustainable and responsible refrigerate management support.

The fourth quarter of any given year is historically, our lowest revenue gross margin quarter as we saw in 2022.

With significantly lower sales volume as the cooling season ends and many of our customers a mood, they're focused a heating applications.

We believe the 2024 will represent an inflection point for the HSE market and we were confident that our industry, leading reclamation technology distribution network and optimization and convert perversion capabilities provide a strong foundation to grow our company and extend our leadership position.

As our industry embraces more sustainable and environmentally friendly practices and products to meet the growing worldwide demand for cooling and refrigeration solutions.

This is an exciting time for our company and our industry and we look forward to expanding the reach of our products and services as our industry continues to evolve.

Now I'll turn the call over the net to review the financials go ahead that.

Brian for the third quarter ended September 30th 2000, twenty-three Hudson recorded revenues of $76.5 million, a decrease of 15% compared to revenues of $89.5 million in the comparable 2022 period.

The decrease is primarily related to decrease selling prices for certain refrigerants, partially offset by increased refrigerant sales volume.

Revenues from the company is D. L. A defense logistics agency program during the period as compared to the third quarter of 2022.

Gross margin was 40% for the third quarter of 2023 compared to 49% in the third quarter of 2022.

As expected and previously communicated gross margin has begun to moderate as the gap between inventory cost and sales price narrows to more historical levels.

Third quarter gross margin was favorably impacted by increased DLA and carbon credit revenue.

And we remain comfortable with our long range gross margin target of 35 per cent.

SG&A for the third quarter of 2023 was $6.8 million compared to SG&A of $7.2 million recorded in the third quarter of 2022.

We recorded operating income of $23.1 million in the third quarter of 2023 compared to operating income of $36.3 million in the third quarter of 2022.

The company recorded net income of $13.6 million or 30 cents per basic and 29 cents per diluted share in the third quarter of 2023 compared to net income of $29.4 million or 65 cents per basic and 62 cents per diluted share in the same period of 2022.

During the third quarter of 2023, the company recorded $3.4 million of non-recurring costs.

Primarily related to that right off of deferred financing costs with respect to the full and final pay off of the company's term loan which are included as an interest expense and the company's statements of income X.

Excluding these non-recurring costs Hudson achieved non-GAAP adjusted net income of $16.1 million or 35 cents per basic and 34 cents per diluted share in the third quarter of 2023.

A reconciliation of net income and earnings per share to non-GAAP adjusted net income and non-GAAP adjusted earnings per share. It is included in today's press release.

Just a note related to net income.

As Brian mentioned earlier during the third quarter Hudson paid off its remaining 32 and a half million dollars term loan debt and achievement, we reached more than three and a half years ahead of the March 2027 maturity date.

Operator: Greetings. Welcome to the Hudson Technologies Third Quarter 2023 earnings call. At this time, all participants are in a listen-only mode.

Over the last 15 months, we have repaid $100 million in term loan that saving the company over $10 million a annualized interest.

Operator: A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded.

We're pleased to have been able to pay off the terminal on that significantly ahead of schedule and anticipate that the elimination of this that will enable us to further reduce our interest expense.

Jennifer Belodeau: I will now turn the conference over to your host, Jennifer Belodeau. You may begin. Thank you.

And improve our balance sheet.

In addition, after the end of the third quarter, we paid off the remaining $5 million of revolver that we had outstanding.

Jennifer Belodeau: Good evening and welcome to our conference called to discuss Hudson Technology's financial resource results for the third quarter 2023. On the call today are Brian Coleman, President and Chief Executive Officer, and Nat Krishnamurti, CFL. Now take a moment to read the State of Harbor Statements. 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 very, on our best view of the industry and of our businesses, as we see them today, they are not guarantees of future performance.

The company's effective tax rate for 2023 in future periods, where reflect a statutory tax rate of approximately 26.1%.

Excluding certain temporary and permanent tax adjustments.

Jennifer Belodeau: 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.

The nine months ended Sept September 30th 2022 period reflected in effective tax rate of 11.9% due to the release of the company's valuation allowance at that time.

During the three months ended September 30th 2000, twenty-three the company generated $21.9 million of cash flow from operations compared to $26.1 million. During the three months ended September 30th 2022.

Jennifer Belodeau: We urge you to review Hudson's most recent form 10K 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.

Stockholders equity improved to $225 million at September 30th 2023, as compared to $175 million at December 31st 2022.

The company's availability consisting of cash and a revolver revolver availability at September 30th 2023 was $71 million as he continues to generate additional cash flow in 2023, we expect to one ensure we have adequate inventory on hand and to consider other opportunities.

Jennifer Belodeau: With that out of the way, I'll turn the call over to Brian Coleman. Go ahead, Brian.

Brian Coleman: Good evening, and thank you for joining us. We delivered solid third quarter results, which included continued profitability and strong cash flow, to close out our traditional nine-month cooling season. That said, as we expected, on a comparative basis, third quarter 2023 revenue margin decreased relative to the significantly strong revenue margin performance achieved in 2022. The primary driver for the comparative decrease was a 27% decline in the sales price for certain refrigerants when compared to the third quarter of 2022.

As they arise.

We have strong liquidity.

In our revolving loan credit facility provides us with a solid financial platform and flexibility as we look forward I will now turn the call back over to Brian.

Thank you that our third quarter performance provided a solid close to 2023 cooling season.

As I said earlier, we believe the unprecedented 40% step down in the HSE baseline production and consumption allowances represents a tremendous opportunity for our company and its reclaim the capabilities to bridge the anticipated a gap.

Brian Coleman: As we detailed previously throughout most of 2022, we saw substantial sale price increases without a corresponding increase in inventory price. Conversely, the 2023 cooling season was characterized both a challenging pricing environment and lower sales volume for the nine-month season. Specifically, for the nine-month period, we saw a decline of approximately 17% in the sale price of certain refrigerants as compared to the first nine months of last year. In addition, the later arrival of warmer weather to many parts of the U.S., which impacted demand for certain refrigerants, slightly impacted volume unfavorably for this season.

Of the HSE supply and demand.

We remain focused on our commitment to providing the sustainable products and services, which will allow safe and efficient cooling and refrigeration utilizing more environmentally friendly alternatives.

Operator will now open the call to questions.

Thank you at this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.

Brian Coleman: Even with the significant pricing headwinds, we achieved our gross margin of 40%, which is slightly higher than our long-term targeted gross margin levels. Margin's were favorably impacted, again, this quarter, similar to what we saw in the second quarter this year, from higher margin carbon sales and from sales related to the DLA contract. Without those additional contributions, gross margins would have been closer to 38%. As we mentioned last quarter, we are tracking toward the highest annual revenue from our DLA contract.

Confirmation tonal indicate your line is in the question queue. You May press start to if you would like to remove your question from the queue for.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.

Our first question comes from Jerry Sweeney with Roth Capital Jerry. Please proceed.

Good afternoon.

And thanks for taking my call.

Good afternoon <unk> Hello.

Could you.

Brian Coleman: From our vantage point, we remain comfortable with our long-range gross margin target of 35%. Our ability to consistently deliver strong, profitable, and operating cash flow allowed us to aggressively pay down our debt during the last several quarters, and that progress culminated with the full repayment of our term loan during the quarter. Notably, we are very pleased to achieve the full repayment well ahead of our March 2027 maturity date, and we anticipate that the elimination of this debt will enable us to further reduce our interest expense and improve our balance sheet.

Talk a little bit about the H.

H S H F C reclaim activity.

Hudson as well as you know.

Potential opportunities to increase just overall reclaim industry reclaim activity.

Visa the E P a.

Rulings that are.

Being worked out.

So we typically report our annual reclaim numbers at the end of the year and the reason we've done that historically, while the refrigerant sales typically wind down in queue for our recovery comes in pretty strong all the way through.

<unk> sales wind down and the Q3.

Brian Coleman: As you know, our industry is preparing for the unprecedented 40% baseline reduction in virgin HSC production and consumption allowances, which will be effective at the start of 2024. We believe that the current phase-down represents a significant opportunity for our business. With the current install base of HSC equipment, which is currently estimated 125 million units, the aggressive reduction in virgin HSC production is expected to meaningful impact the supply landscape, creating enhanced demand for reclaim refrigerants over time to fill what is anticipated to become a substantial gap between HSC supply and demand.

The recovery reclamation activity continues through most of our queue for part of it is the accumulation of refrigerants held by contractors, but we're now entering that season, where a larger systems are being turned down and retrofits and conversions occur. So we'll be reporting on that at the end of the year, but so far it's been.

Strong reclaim year.

Moving to the other part of your question.

The refrigerant management rule.

Dpa's really taking a significant move to mandate the use of reclamation, both at the OEM level and at the servicing level and the anticipated demand in the future depending on the type of refrigerant and the C. O. Two equivalent is certainly in some instances as low as maybe a.

Brian Coleman: Additionally, the reclamation industry is positioned to benefit as the regulatory environment around refrigerants and cooling equipment becomes more stringent. There are ongoing efforts on both the state and federal levels to require tracking and detailed reporting designed to keep track of refrigerants from cradle to end of life as a means to deter the practice of venting and to encourage reclamation. Many of you have likely seen the EPA's rules issued in nearly October.

Six time grow from where we are today to possibly as high as a 10 full growth where we are today, but.

Particularly what we think will be interesting to see is how.

Allowance holders will treat higher GGP refrigerants, like four foray or possibly for today and whether there'd be willing to continue to produce them.

And whether or not that didn't becomes an opportunity for the higher GDP gas has to really be served 100 per cent with reclaim refrigerants. These kinds of things. We don't really know today, how all of this will progress, but likely will see trends occurring throughout 2024 it into 2025.

Brian Coleman: The first was the finalization of the Technology Transition Rule and the agency also published a long-awaited proposed refrigerant management rule. We are encouraged by the bold initiatives that the EPA has taken around the proposed refrigerant management rule, particularly those that outline potential mandates for the use of reclaimed refrigerants by OEMs for new systems and the use of reclaimed refrigerants in servicing activities. These proposed initiatives will require a significant increase in reclaimed volumes, particularly for higher GDPHFCs such as 444A and 410A.

About how folks will think about higher G P refrigerants versus lower GDP HFC refrigerants. So hopefully answer your question Jerry.

Yeah, and just on the the the higher G. G. W. P refrigerator.

Correct me, if I'm wrong, but you know the 404 I it it's a higher impact to the environment. So it uses up more allowances. So that's.

Brian Coleman: I want to stress that the refrigerant management rule is a proposed rule which is currently making its way through the commentary process. But we are pleased with the aggressive stance set forth by the EPA. It's encouraging to see a broader proposed regulatory focus addresses venting deterrence which should also increase the pool of refrigerant that can be recovered. It also promotes the adoption of lower GOP cooling technology and the use of reclaimed refrigerants.

You know from a.

[noise], let's see economical point of view producers would wanna produce less of that and more of a lower Cheetah G. W. P. <unk>.

Gas or they can produce a higher volume of that does that.

Is that correct.

Did it correctly or clearly.

No I think you're you're you're exactly right so to be specific for for a is like 4000 to one 130 phrase closer to 1000.

Brian Coleman: Hudson has an advantage as the industry shifts because we've won't be a proponent and a practitioner of the circular economy of refrigerants and proper refrigerant management. Importantly our technology is agnostic. We've been recovering and reclaiming refreshers since the early 1990s and our technology works with any and all types of refrigerant from legacy CFCs and HFCs to today's HFCs and to future HFOs. Our operational model can essentially provide a closed loop in which refrigerant is sold into the market for new equipment or for service and cooling systems and later when services require or the system reaches end of life, the gas is recovered and returned to Hudson for reclamation without any emission to the atmosphere.

Refrigerant, that's likely going to get a foothold over the next five years is R 32.

And that's about 675.

So say it another way to what you just described if you're going to make let's say 130, Fray you could probably make close to four pounds compared to one pound of four foray.

So should for for a be priced at four times 134, a as as as an example, or just not make it at all and these are things. We just don't know yet as I just said a moment ago will start to see trends in 2024, and it's certainly by 25 will have a better understanding how people will think about things and to go back.

This is why this particular phase out has many differences.

Compared to the Ods phase outs.

Brian Coleman: So we believe that we are uniquely positioned with our proprietary reclamation technology as well as our system optimization and conversion services to grow our leadership role in the shift of lower GDP refrigerants and cooling technologies. Longer term, we believe industry stakeholders will increasingly embrace the environmental benefits of using reclaimed refrigerant which is nearly a zero GDP gas. Our ability to reclaim refrigerant is dependent on recovering refrigerant and we have focused on working with customers who share our commitment to the circular economy for refrigerants.

One particular difference here is even with a 40% reduction in the H a C <unk>.

Consumption allowances for next year, all new equipment for the most part will be HFC base being installed, whereas with 22. The equipment was phased out 10 years before the refrigerant was so there's a lot of differences there, but again the big difference here, it's not a refrigerant phase out it's a seal to eat phase out.

Got it.

Scuse me.

Second.

Question gross margins, 40% above your long term goal of 35%.

And I do see prices down you know in terms of Ah refrigerant prices down so.

Brian Coleman: We have also been very active at industry forums and conferences promoting our vision for the adoption of sustainable and responsible refrigerant management among our industry partners. Recent events and discussions that we have attended include the Green Build Conference, the Allied Air Conference and several state plumbing heating cooling contractors association meetings.

You would assume.

You know, if you're collecting gas and paying 50 per cent of the pricing.

You would assume somewhat of a lower gross margin.

On the inventory roles.

But can you walk me through maybe the 40% gross margin how impactful with a carbon credit sales DLA project versus.

Brian Coleman: In July, Hudson's Emerald Refrigerant, our reclaimed refrigerant brand was named top product of 2023 by Environment Plus Energy Leader and awards program that recognizes excellence in products and projects that deliver significant energy and environmental benefits. We also recognize the importance of participating in global efforts to raise awareness and accelerate the global transition to efficient and climate-friendly cooling alternatives. In early October, Hudson announced that we joined the Cool Coalition, a global multi-stakeholder network assembled by the United Nations Environment Program that connects a wide range of key participants from government, cities, international organizations, businesses, finance, academia, and civil society groups to facilitate knowledge exchange, advocacy, and joint action toward climate-friendly cooling alternatives.

I guess some of the other gaffsail, so we get a little bit clearer picture of what's going on there.

Well as we said without the those two groups.

Sales gross margins would have probably been closer to 38%.

DLA.

Right now, we're seeing a tremendous amount of activity much more so than we've ever seen before this.

This is now the second quarter that we reported their revenues erupt and we're like we headed towards a record annual revenue volume with the DLA, which will report it your red car.

Carbon of sales just kind of come and go they're not overly material, but because the offset market has been pretty strong in terms of pricing.

The margins on that transaction, when you complete them, which could take some time could be higher than what they might've been historically so.

At some point, we're not sure.

How our inventory costs will compare to pricing, but if there was a stable pricing environment that are costing should increase relative to the sale price, which should take us to something closer to.

Brian Coleman: And I just returned from Nairobi, where last week Hudson participated at the 35th meeting of the parties of the Montreal Protocol on substances that deplete the ozone layer. We're pleased to have these opportunities to share our expertise and interact with other stakeholders on a global level. As we move through the balance of 2023, we remain focused on continuing to be a reliable resource to our customers by providing sustainable and responsible refrigerant management support.

Overall blended 35% gross margin, if we see price increases.

We saw with 2022, then we could do much better on the gross margin level and then certainly if we see the growth and reclamation as anticipated refrigerant manager rule from the EPA. Then are mixed would change and then we would have higher or more volume of refrigerants that we reclaimed versus distributing.

Brian Coleman: The fourth quarter of any given year is historically our lowest revenue gross margin quarter, as we saw on 2022, with significantly lower sales volume as the cooling season ends and many of our customers are more focused on heating applications. We believe that 2024 will represent an inflection point for the HSC market, and we are confident that our industry leading reclamation technology, distribution network, and optimization and conversion capabilities provide a strong foundation to grow our company and extend our leadership position as our industry embraces more sustainable, environmentally friendly practices and products to meet the growing worldwide demand for cooling and refrigeration solutions. This is an exciting time for our company and our industry, and we look forward to expanding the reach of our products and services as our industry continues to evolve.

<unk> product, we bought from a producer in the margins of reclaimed typically are closer to 250%, which would help improve that overall blood.

Got it helpful I I'll jump back to nine I appreciate it.

Thank you.

The next question comes from Ryan signal from Craig Hallum Capital. Please proceed.

Hey, Brian that.

Good evening.

Curious the decline in that refrigerant pricing I think it was down a little bit sequentially as well, but can you talk through what you're seeing in the industry and what you think drove that as we get closer to 2024 Little surprises me thought dropped a little lower I'm kind of at the tail end of the season here.

Yeah, So we think.

As it relates starting back to Q3 of last year like the very tail and let's see the month of September we saw prices started to come down and possibly that allowance holders.

Nat Krishnamurti: Now I'll turn the call over to Nat to review the financials. Go ahead, Nat. Thank you, Brian.

Nat Krishnamurti: For the third quarter-ended September 30, 2023, Hudson recorded revenues of $76.5 million, a decrease of 15% compared to revenues of $89.5 million in the comparable 2022 period. The decrease is primarily related to decreased selling prices for certain refrigerants, partially offset by increased refrigerant sales volume, and revenues from the company's DLA or Defense Logistics Agency program during the period, as compared to the third quarter of 2022. Gross margin was 40% for the third quarter of 2023, compared to 49% in the third quarter of 2022.

Over estimated with demand might be in the second half of the year relative to the first half of the year and they may have found that they had extra allowances. So they started to lower the price we think that philosophy for the allowance holders continued into.

The beginning of the 2023 year.

And unfortunately, Q1s weather was not as warm as Q1s whether of 2022.

So if you're in a situation, where you need to sell you're likely going to be forced to sell at a lower price.

We saw the lower pricing condition continue.

Nat Krishnamurti: As expected and previously communicated, Gross margin has begun to moderate as the gap between inventory cost and sales price narrows to more historical levels. Third quarter, Gross margin was favorably impacted by increased DLA and carbon credit revenue, and we remain comfortable with our long-range Gross margin target of 35%. SGNA for the third quarter of 2023 was $6.8 million compared to SGNA of $7.2 million recorded in the third quarter of 2022. We recorded operating income of $23.1 million in the third quarter of 2023 compared to operating income of $36.3 million in the third quarter of 2022.

Pretty much through most of the nine month season going from somewhere above $10, a pound to probably a low of about $8 a pound in general for Hfc's.

Recently, we've seen a little rebounding in HSC pricing.

As we exited Q3 starting into Q4.

We feel pretty good about where the pricing is at the moment, it's headed towards back towards that $10 a pound it looks like a.

Price that we sort of started the year at.

And so we just think next year is going to be a whole new year to start over in some respects most of the customers that buy refrigerate are not gonna buy until let's say March of next year April of next year once they get out of the heating equipment and start to get into the cooling equipment.

Nat Krishnamurti: The company recorded net income of $13.6 million or $30 per basic and $29 per due-loaded share in the third quarter of 2023 compared to net income of $29.4 million or $65 per basic and $66 per due-loaded share in the same period of 2022. During the third quarter of 2023, the company recorded $3.4 million of non-recurring costs, primarily related to the right off of deferred financing costs with respect to the full and final payoff of the company's term loan, which are included as interest expense in the company's statements of income.

And likely the overall psychological impact of a 40% reduction will somehow be reflected in pricing starting in Q1 of 2024.

With the price headwinds this year, you're still putting up surprising upside to the margins I guess keep talking to 35 per cent or a little better but.

Nat Krishnamurti: Excluding these non-recurring costs, Hudson achieved non-gap adjusted net income of $16.1 million or $35 per basic and $34 per due-loaded share in the third quarter of 2023. A reconciliation of net income and earnings per share to non-gap adjusted net income and non-gap adjusted earnings per share is included in today's press release. Just a note related to net income. As Brian mentioned earlier, during the third quarter, Hudson paid off its remaining $32.5 million in term loan debt.

Without those price headwinds I would think you would have been even better in the corner. So I guess can you talk to your structural margins in the business in the industry. You mentioned the one time was pretty even at 38% that's solidly better with those price headwind so any extra color on the margin.

Again, I think we have done a pretty good job going back a few years, we started the initiative.

Of trying to create more value proposition with not all customers not all buyers of refrigerate.

Because many buyers of refrigerant are just looking for cheap price, but we focused on working with customers that had the opportunity to support recovery reclamation to support the principles, we have around lifecycle refrigerant management.

Nat Krishnamurti: In achievement, we reached more than three and a half years ahead of the March 20, 27 maturity date. Over the last 15 months, we have repaid $100 million in term loan debt, saving the company over $10 million of annualized interest. We're pleased to have been able to pay off the term loan debt significantly ahead of schedule and anticipate that the elimination of this debt will enable us to further reduce our interest expense and improve our balance sheet.

And as a result, I think the strength of the relationship helps in some respects relative to other customers who are just focused on price and we think that's going to be important as we enter 2024.

I think it and certainly can't say that is true, but I think that those folks that were focused on price are gonna have a hard time.

Nat Krishnamurti: In addition, after the end of the third quarter, we paid off the remaining $5 million of revolver debt we had outstanding. The company's effective tax rate for 2023 and future periods will reflect a statutory tax rate of approximately 26.1 percent, excluding certain temporary and permanent tax adjustments. While the nine months ended September 30, 2022 period reflected an effective tax rate of 11.9 percent due to the release of the company's valuation allowance at that time.

Getting access to supply next year, we're certainly having a hard time to buy in a matter by which they previously did so so we're happy with our customer base. We tried to grow the customer base, we tried to introduce reclamation and recovery programs to customers. We spent a lotta time this year going downstream to contract.

Just to help educate them on the importance of recovery.

To give them best practices to help speed up the recovery once they have that opportunity. So we feel pretty good I mean really good I guess about our relationship with our customers and our ability to translate that into value and profitability.

Nat Krishnamurti: During this three months ended September 30, 2023, the company generated $21.9 million of cash flow from operations compared to $26.1 million during the three months ended September 30, 2022. Stockholders' equity improved to $225 million at September 30, 2023, as compared to $175 million at December 31, 2022. The company's availability consisting of cash and revolver availability at September 30, 2023 was $71 million. As we continue to generate additional cash flow in 2023, we expect to one, ensure we have adequate inventory on hand and two, consider other opportunities as they arise. We have strong liquidity and our revolving loan credit facility provides us with a solid financial platform and flexibility as we look forward.

Good then just switching over to the carbon credit opportunity, we're hearing more excitement in the industry around that opportunity and a quantitative metrics you can share about girls inner carbon credits and how you think what the opportunity over the next few years.

We actually don't necessarily think the carbon markets.

Have a growth opportunity for Hudson.

We're currently participating in two types of markets. One is a mandatory market relative to the state of California.

But the protocol that is.

Is related to refrigerants is solely attributable to the destruction of Cfc's.

And as you know C F C's and CFC equipment has been installed or manufactured since 1994.

Brian Coleman: I thank you, Nat. Our third quarter performance provided a solid close to the 2023 cooling season.

We just feel that that protocol and the availability of cfcs or sunsetting and so to the extent that there are no more CFC systems at some point then the protocol really will have no material value.

Brian Coleman: As I said earlier, we believe the unprecedented 40 percent step down in the HSC baseline production and consumption allowances represents a tremendous opportunity for our company and its reclaim capabilities to bridge the anticipated gap of the HSC supply and demand. We remain focused on our commitment to providing the sustainable products and services which will allow safe and efficient cooling and refrigeration utilizing more environmentally friendly alternatives.

On a voluntary basis currently there's a protocol that supports reclamation of Hfc's.

But because it's voluntary.

It likely is gonna go away when the mandate for uses of reclaim refrigerants are put in place. Because then it's not really a voluntary process. It's a mandated process and typically when that's the case the voluntary protocol goes away. So we don't.

Operator: Operator will now open the call to questions. Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your hands set before pressing the star keys. One moment please while we pull for questions.

No what will happen with these different protocols, but the ones that we currently operate in likely will diminish or possibly go away.

In time alter.

Alternatively, new protocols could be established and then there could be a new opportunity if and when they were established.

Helpful. Thanks, Good luck.

Jerry Sweeney: Our first question comes from Jerry Sweeney with Roth Capital. Jerry, please press star one on your telephone keypad. Good afternoon, Brian and Nat, thanks for taking my call. Good afternoon, Jerry, hello. Could you talk a little bit about the HFC Reclaim Activity at Hudson as well as potential opportunities to increase just overall industry, reclaim activity vis-a-vis the EPA rulings that are being worked out? So we typically report our annual reclaim numbers at the end of the year.

Thank you.

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

Hi, Brian Good evening.

Good evening.

Jerry Sweeney: And the reason we've done that historically while the refrigerant sales typically wind down a Q4, our recovery comes in pretty strong all the way through, or refrigerant sales wind down at the Q3, the recovery and reclamation activity continues through most of Q4. Part of it is the accumulation of refrigerants held by contractors, but we're now entering that season where larger systems are being turned down and retrofits and conversions occur.

So just a question here do you expect that the the the contractors in the in the eight track industry are adequately prepared to increase the amount of reclamation, that's being that's going on in the number of cylinders being sent to Reclaimer's five per second or third quarter.

Next year or do you think that it could potentially be quite chaotic just given the 40% Virgin production cap.

Historically.

Participants in our industry.

Are less prepared than we would think they should be.

And likely that's the case for next year.

However, what we have been doing particularly for this calendar year, probably started the second half of last year.

Is trying to create more awareness and participate.

Educational seminars and training seminars geared for contractors.

So I think the folks that we've been able to touch and reach and speak to an folks that listen to the playback and things like that should be prepared.

Brian Coleman: So we'll be reporting on that at the end of the year, but so far it's been a strong reclaim year. Moving to the other part of your question and the refrigerant management rule, the EPA is really taking a significant move to mandate the use of reclamation both at the OEM level and at the servicing level. And the anticipated demand in the future, depending on the type of refrigerant and CO2 equivalent, is certainly in some instances as low as maybe a six-time growth from where we are today to possibly as high as a ten-fold growth where we are today.

You raise a good question.

Question cylinders and access to cylinders.

There may be some reclaimer's then it will have difficulties getting access to cylinders and supporting greater recoveries.

We already use pretty substantial reusable fleet, which recovery cylinders are reusable steel as opposed to the disposable.

So well, we can't say that there won't be some shortages on cylinders next year, particularly if there was a significant growth and reclamation I think our position with cylinders, an availability of access to getting cylinders, possibly would be better than most others in the reclamation industry.

Brian Coleman: Particularly what we think will be interesting to see is how allowance holders will treat higher GDP refrigerants like 404A or possibly 410A, and whether they'll be willing to continue to produce them, and whether or not that then becomes an opportunity for the higher GDP of gas is to really be served 100% with reclaim refrigerants. These kinds of things we don't really know today, how all of this will progress, but likely we'll see trends occurring throughout 2024 and into 2025 about how folks will think about higher GDP refrigerants versus lower GDP HFC refrigerants.

And do you expect that your current lamp number of laboratories in your in your footprint is sufficient.

The <unk> in the reclamation I know you talked about adding ships.

You're you're correct.

We're still waiting for the 22 data should be out very shortly but as it goes back to the 21 data. If you look at the totality of the reclaimed pounds 21 was lower than some of the peak years by a few million pounds industrywide. So today, let's say reclaimer's or an average of probably.

Brian Coleman: So hopefully answer your question, Jerry. Yeah, and just on the higher GDP, GDP refrigerant cracked me from wrong, but the 404A, it's a higher impact to the environment, so it uses up more allowances. So that's from an economical point of view, producers would want to produce less of that and more of a lower GDP gas, so they can produce a higher volume of that. Is that correct if I articulated it correctly or clearly?

Claiming fewer pounds and what was the peak period, but even back to the peak period. The Epa's done studies are industry that would've said that there was you know enough capacity to more than triple the volume. We've always talked about we could always go to a second shift if we needed on Ah reclaim capacity.

We've been investing each and every year on more lean production.

Processes, but also automation, particularly around the handling of cylinders. So that when a silver comes in the door within two business days is cylinder goes out.

Brian Coleman: Yeah, no, I think you're exactly right. So to be specific, you know, 404A is like 4,000-1. 1304A is closer to 1,000. A refrigerant that's likely going to get a foothold over the next five years is R32, and that's about 675. So, say in another way to what you just described, if you're going to make, let's say, 130 for A, you could probably make close to 4 pounds compared to 1 pound or 4 for A.

And a lot of the automation that we're adding would correlate to how the propane industry evolved in the mid to late nineties with the general swap programs that you see today and.

And how to refurbish and move steeled through a plan to to their fill lines and so forth. So.

We spend a lotta time and energy, we think we'll be able to.

Meet any growth in capacity, we certainly do expect to have additional capex dollars, but typically our capex is $5 million annually or less and likely that cut a trend I would expect to continue unless there was something meaningful and a change in what we decided to do.

Brian Coleman: So, should 4 for A be priced at 4 times 130 for A as an example or just not make it at all. And these are things we just don't know yet. As I just said a moment ago we'll start to see trends in 2024 and then certainly by 25 we'll have a better understanding how people will think about things.

Okay, great. Thanks for the details.

Brian Coleman: And to go back, this is why this particular phase out has many differences compared to the ODS phase outs. One particular difference here is even it would have 40% reduction in the HFC consumption allowances for next year. All new equipment for the most part will be HFC base being installed. Whereas with 22 the equipment was phased out 10 years before the refrigerant was. So, there's a lot of differences there, but again the big difference here is not a refrigerant phase out.

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

Thank you operator.

I'd like to thank our employees for their continued support and dedication to our business.

I want to again, thank our longtime shareholders and those that recently joined us for their support.

We look forward to speaking with you after the first after the fourth quarter results and have a good night everybody.

Thank you.

Brian Coleman: It's a CO2E phase out. Got it. Excuse me.

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

Brian Coleman: Second kind of question. Close margins 40% above your long term goal of 35%. And I do see prices down in terms of refrigerant prices down. So, you would assume, you know, if you're collecting gas and paying 50% of the price and you would assume somewhat of a low gross margin depending on inventory roles. But can you walk me through maybe the 40% gross margin how impactful with a carbon credit sales and the DLA project versus I guess some of the other gas sales so we get a little bit clearer picture what's going on there.

Brian Coleman: Well, as we said, without those two groups that of sales gross margins would have probably been closer to 38%. DLA right now we're seeing a tremendous amount of activity much more so than we've ever seen before. This is now the second quarter that we reported their revenues are up and we're likely headed towards a record annual revenue volume with the DLA, which will report at your end. Carbon sales just kind of come and go.

Brian Coleman: They're not overly material, but because the offset market has been pretty strong in terms of pricing the margins on that transaction when you complete them, which could take some time. Could be higher than what they might have been historically so at some point, we're not sure how our inventory costs will compare to pricing. But if there was a stable pricing environment, then our costing should increase relative to the sale price, which then should take us to something closer to overall blended 35% gross margin.

Brian Coleman: If we see price increases, like we saw with 2022, then we could do much better on the gross margin level. And then certainly if we see the growth and reclamation as anticipated and refrigerant manager rule from the EPA, then our mix would change. And then we would have higher or more volume of refrigerants that we reclaim versus distributing product we bought from a producer.

Jerry Sweeney: And the margins on reclaim typically are closer to 50% which will help improve that overall blend. I will jump back in line. I appreciate it. Thank you.

Ryan Sigdahl: The next question comes from Ryan Sigdahl from Craig Halem Capital. Please proceed. Hey Brian, Nat. Good evening. Curious the decline in at referred room pricing, I think it's down a little bit sequentially as well, but can you talk through what you're seeing in the industry and what you think drove that as we get closer to 2024, a little surprised when we saw it drift a little lower at the tail end of the season here.

Ryan Sigdahl: Yes, so we think as it relates starting back to Q3 of last year, like the very tail end, let's see the month of September, we saw prices starting to come down and possibly that allowance holders overestimated what the man might be in the second half of the year, relative to the first half of the year, and they may have found that they had extra allowances, at least start to lower the price. We think that philosophy for the allowance holders continued into the beginning of the 2023 year, and unfortunately, Q1's weather was not as warm as Q1's weather 2022, so if you're in a situation where you need to sell, you're likely going to be forced to sell at a lower price, and we saw the lower pricing condition continue pretty much through most of the nine-month season going from somewhere above $10 a pound to probably a low of about $8 a pound in general for HFCs.

Ryan Sigdahl: Recently, we've seen a little rebounding in HFC pricing as we exited Q3 starting into Q4. We feel pretty good about where the pricing is at the moment. It's headed towards back towards that $10 a pound, it looks like a price that we sort of started the year at, and so we just think next year is going to be a whole new year to start over in some respects. Most of the customers that buy refrigerant are not going to buy until let's say March of next year, April of next year, once they get out of the heating equipment and start to get into the cooling equipment, and likely the overall psychological impact of a 40 percent reduction will somehow be reflected in pricing starting in Q1 of 2024.

Ryan Sigdahl: With the price headwinds this year, you're still putting up surprising upside to the margins. I guess keep talking at 35 percent or a little better, but without those price headwinds, I would think it would have been even better in the quarter. I guess can you talk through structural margins in the business, in the industry, you mentioned the one-timers, but even at 38 percent, that's probably better with those price headwinds. Any extra color on the margin?

Ryan Sigdahl: Again, I think we have done a pretty good job going back a few years. We started the initiative of trying to create more of a value proposition with not all customers, not all buyers are refrigerant, because many buyers are refrigerant are just looking for cheap price, but we focused on working with customers that had the opportunity to support recovery and reclamation, to support the principles we have around life cycle refrigerant management.

Ryan Sigdahl: As a result, I think the strength of the relationship helps in some respects relative to other customers who are just focused on price. We think that's going to be important as we enter 2024. I think, and I can't say that this is true, but I think that those folks that were focused on price are going to have a hard time getting access to supply next year, or certainly having a hard time to buy in a manner by which they previously did so.

Ryan Sigdahl: So we're happy with our customer base. We try to grow the customer base. We try to introduce reclamation and recovery programs to customers. We spent a lot of time this year going downstream to contractors to help educate them on the importance of recovery, to give them best practices, to help speed up the recovery once they had that opportunity.

Brian Coleman: So we feel pretty good, I mean, really good, I guess, about our relationship or our customers and our ability to translate that into value and profitability.

Ryan Sigdahl: Good, then just switching over to the carbon credit opportunity. We're hearing more excitement in the industry around that opportunity. Any quantitative metrics you can share about growth in your carbon credits and how you think about the opportunity over the next few years? We actually don't necessarily think the carbon markets have a growth opportunity for Hudson. We're currently participating in two types of markets. One is a mandatory market relative to the state of California, but the protocol that is related to refrigerants is solely attributable to the destruction of CFCs.

Ryan Sigdahl: And as you know, CFCs and CFC equipment have been installed or manufactured since 1994, we just feel that that protocol and the availability of CFCs are sunsetting. And so to the extent that there are no more CFC systems at some point, then that protocol really will have no material value. On a voluntary basis, currently, there's a protocol that supports a reclamation of HFCs, but because it's voluntary, it likely is going to go away when the mandate for uses of reclaim refrigerants are put in place because then it's not really a voluntary process.

Ryan Sigdahl: It's a mandated process. And typically, when that's the case, the voluntary protocol goes away. So we don't know what will happen with these different protocols, but the ones that we currently operate in likely will diminish or possibly go away in time, alternatively new protocols could be established, and then there could be a new opportunity if and when they are established. Helpful. Thanks. Good luck, guys. Thank you.

Austin Muller: The next question comes from Austin Muller with Canacord. Austin, please proceed. Hi, Brian.

Austin Muller: Good evening. So just a question here, do you expect that the contractors in the HVAC industry are adequately prepared to increase the amount of reclamation that's going on in the number of cylinders being sent to reclaimers by the second or third quarter of next year? Or do you think that it could potentially be quite chaotic just given the 40 percent virgin production cap? Historically, participants in our industry are less prepared than we would think they should be, and likely that's the case for next year.

Austin Muller: However, what we have been doing particularly for this cow in the year and probably started the second half of last year is trying to create more awareness and participate at educational seminars and training seminars geared for contractors. So I think the folks that we've been able to touch and reach and speak to and folks that listen to the playbacks and things like that should be prepared. You raise the good question cylinders and access to cylinders.

Austin Muller: There may be some reclaimers that it will have difficulties getting access to cylinders and supporting greater recoveries. We already use pretty substantial reusable fleet, which recovery cylinders are reusable steel as opposed to disposable. And so, while we can't say that there won't be some shortages on cylinders next year, particularly if there's a significant growth in reclamation, I think our position with cylinders and availability of access to getting cylinders possibly would be better than most others in the reclamation industry.

Brian Coleman: And do you expect that your current number of laboratories and your in your footprint is sufficient to meet the uptick in reclamation? I know you talked about adding chips. You're correct. We're still waiting for the 22 data should be out very shortly, but as it goes back to the 21 data, if you look at the totality of the reclaimed pounds, 21 was lower than some of the peak years by a few million pounds industry wide.

Brian Coleman: So today, let's say reclaimers, our average are probably reclaiming fewer pounds than what was the peak period. But even back to the peak period, the EPA's done studies on our industry that would have said that there was enough capacity to more than triple the volume. We've always talked about we could always go to a second shift if we needed on a reclaimed capacity. We've been investing each and every year on more lean production processes, but also automation, particularly around the handling of cylinders so that when a cylinder comes in the door within two business days, a cylinder goes out.

Brian Coleman: And a lot of the automation that we're adding would correlate to how the propane industry evolved in the mid to late 90s with the general swap programs that you see today, and how to refurbish and move steel through a plan to their fill lines and so forth. So we spend a lot of time and energy. We think we'll be able to meet any growth capacity. We certainly do expect to have additional cat-backs dollars, but typically our cat-backs is $5 million annually or less. And likely that kind of trend I would expect to continue unless there was something meaningful in a change in what we decide to do.

Austin Muller: Okay, great. Thanks for the details.

Operator: We have each handed the question and answer session.

Brian Coleman: I will now turn the call over to management for closing remarks.

Brian Coleman: Thank you, operator. I'd like to thank our employees for their continued support and dedication to our business. I want to again thank our longtime shareholders and those that recently joined us for their support. We look forward to speaking with you after the fourth quarter results and have a good night, everybody. Thank you.

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