Q1 2024 Hudson Technologies Inc Earnings Call

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Operator: Greetings, and welcome to the Hudson Technologies first quarter 2024 earnings call. At this time, all participants are in a listen-only mode. The 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, Jen Belodeau. You may begin.

Speaker Change: Greetings and welcome to the Hudson Technologies first quarter 2024 earnings call.

Speaker Change: At this time all participants are in a listen only mode.

Speaker Change: 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.

Speaker Change: I will now turn the conference over to your host Jen Bilodeau, you may begin.

Jennifer Belodeau: Thank you. Good evening, and welcome to our conference call to discuss Hudson Technologies' financial results for the first quarter of 2024. On the call today are Brian Coleman, President and Chief Executive Officer, and Nat Krishnamurti, Chief Financial Officer. 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.

Jennifer Belodeau: Thank you good evening and welcome to our conference call to discuss Hudson Technologies financial results for first quarter 2024 on the call today are Brian Coleman, President and Chief Executive Officer, and Nat Krishnamurti, Chief Financial Officer.

Jennifer Belodeau: Although they reflect our current expectations and are based on our best view of the industry and of our businesses as we see them today, they are not guarantees of future performance. Please understand that these statements involve a number of risks and assumptions, and since those elements can change and, in certain cases, are not within our control, we would ask that you consider and interpret them in that light. We urge you to review Hudson's most recent Form 10-K and other subsequent SEC filings for a discussion of the principal risks and uncertainties that affect our business and our performance and 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. Go ahead, Brian.

Jennifer Belodeau: I'll now take a moment to read the safe Harbor statement. During the course of this conference call. We will make certain forward looking statements all statements that address expectations opinions or predictions about the future are forward looking statements. Although they reflect our current expectations and are based on our best view of the industry and of our businesses as we see them today. They are not guarantees of future performance.

Jennifer Belodeau: Please understand that these statements involve a number of risks and assumptions and those elements can change and in certain cases are not within our control. We would ask that you consider and interpret them in that light. We urge you to review Hudson's most recent Form 10-K, and other subsequent SEC filings for a discussion and discussion of the principal risks and uncertainties that affect our business.

Jennifer Belodeau: And our performance and other factors that could cause our actual results to differ materially with that out of the way I'll turn the call over to Brian Cowen Go ahead, Brian.

Brian F. Coleman: Thank you. Good evening, and thank you for joining us.

Brian Cowen: Thank you good evening and thank you for joining us our 2020 for selling season has kicked off largely as we expected with our first quarter revenues, reflecting a difficult comparison to the first quarter of 2023.

Brian F. Coleman: Our 2024 selling season kicked off largely as we expected, with our first quarter revenues reflecting a difficult comparison to the first quarter of 2023, which was characterized by higher pricing for certain refrigerants as well as higher volume in 2023 from our DLA contract. As we detailed in last quarter's earnings release, in 2023, we saw the highest annual revenue generated by our DLA contract at $53 million for that year. That amount included approximately $20 million, which was evenly spread across 2023 related to increased DLA-specific program activities that may not be repeated in 2024.

Brian Cowen: Which was characterized by higher pricing for certain refrigerants as well as higher volume in 2023 from our DLA contract.

Brian Cowen: As we detailed in last quarter's earnings release in 2023, we saw the highest annual revenue generated by our DLA contract at $53 million for that year.

Brian Cowen: That amount included approximately $20 million, which was evenly spread across 2023 related to increased deal a specific program activities that may not be repeated in 2024.

Brian F. Coleman: During the first quarter of 2024, our industry saw pricing for certain refrigerants decline by approximately 20% as compared to pricing levels during the first quarter of 2023, with HFC prices currently at approximately $8 per pound. However, pricing may be impacted by factors including the current supply of certain refrigerants in the market and weather. The reduction in refrigerant pricing was slightly offset by increased carbon credit sales and increased service projects during the quarter. However, with the challenging pricing environment, our margin performance was below our long-term target. However, we delivered solid profitability.

Brian Cowen: During the first quarter of 2020 for our industry saw pricing for certain refrigerants declined by approximately 20% as compared to pricing levels. During the first quarter of 2023.

Brian Cowen: With HFC prices currently at approximately $8 per pound.

Brian Cowen: Pricing may be impacted by factors, including the current supply of certain refrigerants in the market and weather.

Brian Cowen: The reduction of refrigerant pricing was slightly offset by increased carbon credit sales and increased service projects during the quarter.

Brian Cowen: With the challenging pricing environment, our margin performance was below our long term target. However, we delivered solid profitability.

Brian F. Coleman: Based on the current pricing levels, we do not believe the long-term targets we set in 2022 for the full year 2025 will be achievable at this time. We will address our long-term view as we progress through this sales season, and we'll have more visibility once the EPA's final refrigerant management rule is published, and we'll have the opportunity to evaluate its long-term impact. With that said, if current pricing levels continue for the balance of the 2024 selling season, we would anticipate full-year revenue in the range of $250 million to $265 million, with gross margin below our targeted 35%.

Brian Cowen: Based on the current pricing levels, we do not believe the long term targets, we set in 2022 for the full year 2025.

Brian Cowen: Will be achievable at this time.

Brian Cowen: We will address our long term view as we progressed through this sales season, and we'll have more visibility once the Epa's final refrigerant management rule is published and will have the opportunity to evaluate its long term impact.

Brian Cowen: With that said if current pricing levels continue for the balance of the 2020 for selling season.

Brian Cowen: We would anticipate full year revenue in the range of 250 to 265 million with gross margin below our targeted 35%.

Brian F. Coleman: Given the ongoing step-down in Virgin HOC production as supply tightens, we do expect to see an increase in the sales price for certain refrigerants, but the timing is difficult to predict. In the meantime, the lower pricing dynamic provides us the opportunity to replenish our inventory with lower-cost refrigerants that we could then sell later this year and certainly next year. To be clear, we view the current pricing dynamic to be temporary in nature, and our longer-term expectation of higher prices, similar to the prior phase-outs, remains the same. Our balance sheet is strong, with no debt, providing us with financial flexibility as we move through 2024, and our industry navigates the continued and ongoing implementation of the AMAC.

Brian Cowen: Given the ongoing step down in Virgin HFC production as supply tightens, we do expect to see an increase in the sales price for certain refrigerants, but the timing is difficult to predict.

Brian Cowen: In the meantime, the lower pricing dynamic provides us the opportunity to replenish replenish our inventory with lower cost refrigerant that we could then sell later this year and certainly next year.

Brian Cowen: To be clear, we view the current pricing dynamic to be temporary in nature, and our long longer term expectation of higher prices similar to the prior phase outs remains the same.

Brian Cowen: Our balance sheet is strong with no debt, providing us with the financial flexibility as we move through 2024, and our industry navigates the continued and ongoing implementation of the aim Act.

Brian F. Coleman: Our selling season comprises nine months from January through September, and while it's still early, we believe the 2024 season will provide valuable visibility related to the ongoing HSE phase-down and the expected corresponding supply, demand, and balance. Moreover, the EPA has referred to the proposed Refrigerant Management Rule as the third leg in the AIM Act implementation. We expect this proposed rule to be finalized in late summer of this year. Furthermore, we expect to see pricing increases as demand begins to outweigh supply due to the phase-down of HFC consumption allowances. It is difficult to predict exactly when this imbalance will occur and begin to drive increased HFC prices.

Brian Cowen: Our selling season comprises nine months from January through September and while it's still early we believe the 2024 season will provide valuable visibility related to the ongoing HFC phasedown.

Brian Cowen: And we expect a corresponding supply demand imbalance.

Brian Cowen: Moreover, the EPA has referred to the proposed refrigerant management rule is the third leg in the aim Act implementation.

Brian Cowen: We expect this proposed rule to be final in late summer of this year.

Brian Cowen: Well, we expect to see pricing increases as demand begins to outweigh supply due to the phase down of HFC conceptual allowances.

Brian Cowen: It is difficult to predict exactly when this imbalance will occur.

Brian Cowen: And begin to drive increased HFC pricing.

Brian F. Coleman: However, we and others in our industry firmly believe that it's not a question of if tighter supply dynamics will take place, with resulting heightened pricing, but a question of when this dynamic will begin to kick in with our established customer and vendor network. As well as our industry-leading reclamation technology, we believe Hudson is well-positioned to benefit as virgin HFC refrigerant production is compressed and the industry begins to rely more meaningfully on reclaimed refrigerants to service the existing installed base of cooling and refrigeration equipment.

Brian Cowen: However, we and others in our industry firmly believe that it's not a question of if tighter supply dynamics will take place with resulting heightened pricing, but a question of when this dynamic will begin to kick in.

Brian Cowen: With our established customer and vendor network.

Brian Cowen: As well as our industry, leading reclamation technology, we believe Hudson is well positioned to benefit as Virgin HFC refrigerant production is compressed in the industry begins to rely more meaningfully on reclaimed refrigerants to service the existing install base of cooling and refrigeration equipment.

Brian F. Coleman: The EPA's proposed Refrigerant Management Rule includes language mandating the use of reclaimed refrigerants for certain applications and equipment. If the final rule is in line with the proposed rule, the industry will see the first federal requirement for the mandatory use of reclaimed refrigerants relative to specific sectors of the industry. These mandates may lead to a pricing differential between virgin source refrigerants versus reclaimed refrigerants, with reclaimed refrigerants priced at higher levels. This would be a much different pricing dynamic compared to what we've experienced over the past 20 years.

Brian Cowen: The Epa's proposed refrigerant management rule includes language mandating the use of reclaim refrigerants for certain applications and equipment.

Brian Cowen: The final rule is in line with the proposal the industry will see the first federal requirement for the mandatory use of reclaim refrigerants relative to specific sectors of the industry.

Brian Cowen: These mandates may lead to a pricing differential between Virgin source refrigerants versus reclaimed refrigerants with reclaim refrigerants priced at higher levels.

Brian Cowen: This would be a much different pricing dynamics compared to what we've experienced over the past 20 years.

Brian F. Coleman: Certain states are also implementing legislation or have proposals under consideration for the mandated use of reclaimed refrigerants. In 2025, for example, California has established a mandate for the use of reclaimed refrigerants in state-governed facilities. Additionally, late last year, the EPA issued a Final Technology Transition Rule, promoting the introduction of lower GDP systems for new construction starting in 2025, as well as a conversion of the current estimated installed base of 125 million HFC legacy systems over the next 20 years.

Brian Cowen: Certain states are also implementing legislation or have proposals under consideration for the mandate mandated use of reclaim refrigerants.

Brian Cowen: In 2025 for example, California has established a mandate for the use of reclaim refrigerants and state government facilities.

Brian Cowen: Additionally, late last year, the EPA issued a final technology transition.

Brian Cowen: Promoting the introduction of lower GDP systems for new construction, starting in 2025 as.

Brian Cowen: As well as the conversion of the current estimated installed base of 125 million HFC legacy systems over the next 20 years.

Brian F. Coleman: Hudson is refrigerant agnostic, with the ability to provide any and all types of refrigerants and service any and all types of systems. As a result, we are well positioned to serve our customers as the industry gradually transitions to next-generation refrigerants and equipment. Indeed, both legislative and regulatory environments are favorable to Hudson. In line with our support of the transition to more efficient and environmentally friendly cooling equipment and refrigerant management, we are actively involved in promoting the practice of refrigerant recovery. Because without recovered gas, you have no opportunity to produce reclaimed refrigerants.

Brian Cowen: Hudson is refrigerant agnostic with the ability to provide any and all types of refrigerants and service any and all types of systems.

Brian Cowen: So we are well positioned to serve our customers as the industry gradually transition to next generation refrigerants and equipment.

Brian Cowen: Indeed, both legislative and regulatory environments are favorable to Hudson.

Brian Cowen: In line with our support of the transition to more efficient and environmentally friendly cooling equipment and.

Brian Cowen: In refrigerant management.

Brian Cowen: We are actively involved in promoting the practice of refrigerant recovery.

Brian Cowen: Because without recovered gas you have no opportunity to produce reclaimed refrigerants.

Brian F. Coleman: To that end, during the first quarter, we attended and presented at various industry conferences, including the Air Conditioning Contractors of America, HVAC Excellence, Plumbing, Heating, Cooling, and Contractors Association Conference and Air Conditioning, Heating, and Refrigeration Expo, to discuss the importance of recovering refrigerant during service calls. We take pride in being a thought leader and helping the industry transition to the new rules. As we navigate through the 2024 selling season, we remain focused on what we can control, meeting our customer needs today while ensuring their seamless transition to next generation and lower GWP cooling technologies as our industry evolves. Now, I'll turn the call over to Nat to review the financials. Go ahead, Nat. Thank you, Brian.

Brian Cowen: To that Ed during the first quarter, we intended and presented at various industry conferences, including the air conditioning contractors of America <unk>.

Brian Cowen: AC excellence plumbing heating cooling contractors Association conference.

Brian Cowen: And air conditioning heating and refrigeration Expo.

Brian Cowen: To discuss the importance of recovering refrigerant during service calls.

Brian Cowen: We take pride in being a thought leader in helping the industry transition to the new rules.

Brian Cowen: As we navigate through the 2020 for selling season, we remain focused on what we can control meeting our customer needs today, while ensuring their seamless transition to next generation and lower GDP cooling technologies as our industry evolves.

Brian Cowen: Now I'll turn the call over to net to review the financials, but thank.

Nat Krishnamurti: Thank you, Brian. For the first quarter ended March 31st, 2024, Hudson recorded revenues of $65.3 million, a decrease of 15% compared to revenues of $77.2 million in the comparable 2023 period. The decrease was primarily related to decreased selling prices for certain refrigerators and low revenue from the company's DLA contract as compared to the first quarter of 2023, as expected. Gross margin was 33% for the first quarter of 2024, as compared to 39% in the first quarter of 2023. SG&A for the first quarter of 2024 was $7.9 million compared to $7 million in the first quarter of 2023. SG&A has grown as the company invests more in personnel and IT.

Net: Thank you Brian.

Net: For the first quarter ended March 31, 2020 for Hudson recorded revenues of $65 3 million.

Net: A decrease of 15% compared to revenues of $77 $2 million in the comparable 2023 period.

Net: The decrease was primarily related to decreased selling prices for certain refrigerants and lower revenue from the company's DLA contract as compared to the first quarter of 2023 as expected.

Net: Gross margin was 33% for the first quarter of 2024 as compared to 39% in the first quarter of 2023.

Net: SG&A for the first quarter of 2024 was $7 9 million compared.

Net: Compared to $7 million in the first quarter of 2023.

Net: SG&A has grown as the company invest more in personnel and it costs.

Nat Krishnamurti: We recorded operating income of $12.8 million in the first quarter of 2024 compared to operating income of $22.7 million in the first quarter of 2022. The company recorded net income of $9.6 million, or $0.21 per basic and $0.20 per diluted share, in the first quarter of 2024, compared to net income of $15.5 million, or $0.34 per basic and $0.33 per diluted share, in the same period of 2023. The company recorded $3 million of income tax expense in the first quarter of 2024 compared to a tax expense of $5.3 million in the first quarter of 2023. The effective tax rates for future periods are expected to reflect an overall combined federal and state rate of 26 percent, subject to various temporary and permanent changes.

Net: We recorded operating income of $12 8 million in the first quarter of 2024 compared to operating income of $22 $7 million in the first quarter of 2023.

Net: The company recorded net income of $9 $6 million or 21 per basic and <unk> 20 per diluted share in the first quarter of 2024.

Net: Compared to net income of $15 5 million.

Net: For 34 cents per basic and <unk> 33 per diluted share in the same period of 2023.

Net: The company recorded $3 million of income tax expense in the first quarter of 2024 compared to a tax expense of $5 $3 million in the first quarter of 2023.

Net: The effective tax rates for future periods are expected to reflect an overall combined federal and state rate of 26%.

Net: Subject to various temporary and permanent difference.

Brian F. Coleman: Stockholders' equity improved to $238.6 million at March 31, 2024, as compared to $228.8 million at December 31st, 2023. The company's availability, consisting of cash and revolver availability, at March 31st, 2024 was $82.5 million. As we generate additional cash flow in 2024, we expect to, one, ensure we have adequate inventory on hand; 2. review any possible M&A opportunities, and 3. Consider a potential share buy-back. We have strong liquidity, and 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.

Net: Stockholders equity improved to $238 6 million at March 31, 2024.

Net: As compared to $228 8 million at December 31, 2023.

Net: The companys availability, consisting of cash and revolver availability at March 31, 2024 was $82 $5 million.

Net: As we generate additional cash flow in 2024, we expect to one ensure we have adequate inventory on hand.

Net: To review any possible M&A opportunities and three consider potential share buybacks.

Net: We have strong liquidity and a 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.

Brian F. Coleman: Thank you, Annette. We maintain our positive longer-term view on the significantly higher sales prices and profitability from the continued and ongoing impact of the AMAC. While 2024 may be a challenging year towards our long-term objectives, it should be noted we are still early in this year's season. The operator will now open the call to questions.

Net: Thinking that we maintain our positive longer term view for the significantly higher sales prices and profitability from the continued and ongoing impact of the aim Act.

Brian: While 2024 may be a challenging year towards our long term objectives. It should be noted we are still early in this year's season.

Speaker Change: Operator, we'll now open the call to questions.

Speaker Change: 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'd like to remove your question from the queue for participants using speaker equipment, it may be necessary to pick up your.

Operator: 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 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star 2. One moment, please, while we poll for questions. Once again, please press star 1 if you have a question or a comment. The first question comes from Ryan Sigdahl with Craig Callum. Please proceed.

Speaker Change: Handset before pressing the star keys, one moment, please while we poll for questions. Once again. Please press star one if you have a question or comment.

Ryan Ronald Sigdahl: First question comes from Ryan signal with Craig Hallum. Please proceed.

Ryan Ronald Sigdahl: Hey, good afternoon, guys. What do you think are the main causes for the lackluster pricing to start the season this far? And then, second to that, I guess, lower HFC pricing in 2024 benefits, inventory replenishment. So I guess why would that negatively impact 2025 gross margin targets of 35%? I would think that'd be positive.

Ryan Ronald Sigdahl: Hey, good afternoon guys.

Ryan Ronald Sigdahl: Yeah, I want to start on pricing I guess what.

Ryan Ronald Sigdahl: What do you think are the main causes for the lackluster pricing to start the season, thus far and then second to that I guess lower HFC pricing in 2024 benefits inventory replenishment. So I guess why would that negatively impact 2025 gross margin targets of 35%.

Speaker Change: Think that'd be positive.

Brian F. Coleman: So, back to the first part of your question, the current pricing dynamic. We had always expected prices to be higher around this time in connection with the overall implementation of the AIM Act.

Speaker Change: So.

Speaker Change: Back to the first part of your question the current pricing dynamic.

Speaker Change: We had always expected prices to be higher around this time in connection with the overall implementation of the aim Act. However.

Brian F. Coleman: However, the counterbalance to that had been what type of stockpile might have come in, particularly in the 2021 year. Unfortunately, initially, let's say back in 2022, that data wasn't available. But more recently, and it's public to everyone, the EPA has published under something called the data hub that in that 2021 year, it looks like we imported and made available about one and a half times the annual cap, so that, if you will, in that year, there's an extra half a year that we would consider a stockpile. Furthermore, the EPA has provided the December 31st, 2022 inventory data.

Speaker Change: The counterbalance to that had been what type of stockpile might have come in particularly in the 2021 year.

Speaker Change: Unfortunately, initially it let's say back in 2022 that data wasn't available, but more recently and it's public to everyone. The epa's published under something called the data hub that in that 2021 year. It looks like we had imported and made available about one and half times the annual.

Speaker Change: Cap.

Speaker Change: So that if you will in that year, there's an extra half a year that we.

Speaker Change: We would consider a stockpile.

Speaker Change: Furthermore, the EPA has provided the 2000 and December 31, 2022 inventory data.

Brian F. Coleman: Now the total number looks like it's about 129% of the cap and may, therefore, mean that some amount of the stockpile has been sold out in that 22 years, although we don't know for certain. So we definitely believe right now, and for how long it may occur in this 2024 selling season, is that pricing is being affected probably because of this stockpile more than anything else. We are obviously going to begin to see warmer weather. Warmer weather, without a doubt, creates further demand, and so forth. So that's the first part.

Speaker Change: Now the total number looks like it's about 129% of the cat and May Therefore mean that some amount of stockpile has been sold out in that 'twenty two year, although we don't know for certain.

Speaker Change: We definitely believe right now and how long it may occur in this 2020 for selling season is the pricing is being.

Speaker Change: Affected probably because of the stockpile more than anything else. We obviously are going to begin to see warmer weather warm weather without a doubt creates further demand and so forth.

Brian F. Coleman: The second part to your question, we're not saying that in 2025 we're not going to get back to the targeted gross margins. What we are simply saying for the moment is that we are taking down that 2025 target that we established. We still believe we're going to get back to the longer-term targets of a gross margin of 35%. But for the current year, in the current year only, we provided guidance relative to the full year, that basically is freezing pricing at, let's say, this $8 pound HFC that we're currently seeing today and running that through the balance of the year.

Speaker Change: So thats the first part the second part to your question, we're not saying that 2025, we're not going to get back to the targeted gross margins what were just simply saying for the moment.

Speaker Change: That were taking down that 2025 target that we established we still believe we're going to get back to the longer term targets of the gross margin of 35%, but for the current year in the current year only.

Speaker Change: We provided guidance relative to the full year that basically is freezing pricing at let's say this $8 power in hfcs that we're currently seeing today and running that through the balance of the year.

Brian F. Coleman: So what we're trying to present is if pricing for this year maintains exactly the way it is at this moment in time, these are the range of outcomes, and the gross margin for this year would be below that target. But as we get through the rest of this year, and let's say we're into around September, we'll certainly know where pricing is for the year, and prices may be higher. But more importantly, we'll also understand what the final refrigerant management rule is, and that will then allow us to provide more long-term guidance and likely return to that more long-term gross margin target of 35%.

Speaker Change: So what we're trying to present is if pricing for this year maintains exactly the way. It is at this moment in time. These are the range of outcomes and the gross margin for this year would be below that target.

Speaker Change: But as we get through the rest of this year and let's say we're into around September, we'll certainly know where pricing is for the year and pricing may be higher.

Speaker Change: But more importantly will also understand what the final refrigerant management rule is and that will then allow us to provide more long term guidance and likely return to that more long term gross margin target of 35%.

Ryan Ronald Sigdahl: Gotcha. Two clarification questions. What was DLA revenue in the quarter? And what was it last year?

Speaker Change: Gotcha, two clarification questions what was DLA revenue in the quarter and what was it last year.

Speaker Change: And then I'll, maybe start with that and then one quick follow up.

Nat Krishnamurti: And then I'll maybe start with that and one quick follow-up.

Speaker Change: Yeah, so the DLA as we said.

Speaker Change: Let's say last year call should run at about $8 million, a quarter and right now Thats, where we are.

Nat Krishnamurti: Yes, so the DLA, as we said, let's say, in the last year-end call, should run at about $8 million a quarter, and right now, that's where we are, which would be $5 million lower roughly compared to 2023. And so that's what we expect. Now, it doesn't mean we can't sell more than that, but we were trying to call out what we think were more one-time surge-type related purchases, but we may be wrong about that. And so, right now, the first quarter ended up where we thought it would in terms of that more normalized, approximately $33 million annual run rate.

Speaker Change: Which would be $5 million lower roughly compare to 2023 and so that's what we expect now it doesn't mean, we can't sell more than that but we were trying to call out what we think we're more.

Speaker Change: One time surge type related purchases, but we may be wrong in that and so right now the.

Speaker Change: First quarter ended up where we thought it would in terms of that more normalized approximately $33 million.

Speaker Change: Annual run rate.

Nat Krishnamurti: And then, what was R22 pricing in the quarter, and do you think you'll grow reclamation volume in your 2024 guidance for R22? Thanks. Yeah, R22.

Speaker Change: And then what was R 22 pricing in the quarter and do you think youll grow reclamation volume in your 2024 guidance for R 22.

Nat Krishnamurti: R22, in a few instances, prices have come under $30 a pound, but in other instances, prices are over $30 a pound. Twenty-two right now isn't overly impacted in terms of price sensitivity, certainly not in the way that HFCs are, because again, back to 22, we don't believe there's any real material stockpiles out there.

Speaker Change: Yes R 22 in a few instances prices have come under $30 a pound, but in other instances prices are over $3 a pound so.

Speaker Change: 22, right now is an overly impacted in terms of price sensitivity certainly not in the way that hfcs are because it get back to 'twenty. Two we don't believe theres any real material stockpiles out there.

Nat Krishnamurti: Great. Thanks, guys. Good luck.

Speaker Change: Great. Thanks, guys. Good luck.

Speaker Change: Thank you.

Speaker Change: The next question comes from Josh Nichols with B Riley. Please proceed.

Ryan Ronald Sigdahl: Yeah, thanks for taking my question. First off, it's really good to see the company providing some additional detail about the quarter and the outlook overall.

Michael Joshua Nichols: Yes, thanks for taking my questions first up a really good to see the company, providing some additional detail about the quarter.

Michael Joshua Nichols: And the outlook overall.

Michael Joshua Nichols: Just for clarification I know you mentioned.

Michael Joshua Nichols: There were some carbon carbon credits in our service sales in the quarter, just so I can get a better idea.

Speaker Change: What were those if you don't mind disclosing them just so I can kind of help triangulate how things may be shaping up for you.

Brian F. Coleman: They're not very large dollars, hundreds of thousands of dollars versus millions of dollars, for example, but like, for example, the carbon market, overall, the prices for carbon offsets have continued to increase over time. Now, like everything else, things could go up or down, but there's been a pretty strong consistency with increased prices for carbon offset projects, as it correlates to California's mandated pricing for carbon. So each year, we tend to get, let's say, a slightly higher margin when we execute a trade on a carbon instrument.

Speaker Change: They're not very large dollars hundreds of thousands of dollars versus millions of dollars for example, but.

Speaker Change: Like for example, the carbon market.

Speaker Change: Overall, the prices for carbon offsets have continued to increase over time.

Speaker Change: Like everything else things could go up or that things could go down, but there has been a pretty strong consistency with increased prices for carbon offset projects.

Speaker Change: As it correlates to California's mandated pricing for carbon.

Speaker Change: So each year, we tend to get let's say slightly higher margin when we.

Speaker Change: Execute a trade of a carbon instrument, but the dollars are relatively low.

Brian F. Coleman: But the dollars are relatively low, and the service business is running in that $7 to $8 million total for the year. It's just that Q1 was up a little bit compared to last year. But we're not talking millions of dollars.

Speaker Change: In the service business.

Speaker Change: Is running in that seven to 8 million total for the year. It's just a Q1 was up a little bit compared to last year, but not we're not talking millions of dollars.

Speaker Change: Okay got it and then well I admittedly, obviously pricing for HFC is being down is going to be a headwind at least from the time being and maybe that changes over the coming months, but well that is a potential headwind for the company is operationally speaking and I'm just curious.

Brian F. Coleman: I got it. And then, well, admittedly, obviously, pricing for HFCs being down is going to be a headwind, at least for the time being, and maybe that changes over the coming months. But well, that is a potential headwind for the companies operationally speaking. I'm just curious, does that make things more attractive on the M&A front? Are there better prices that you're able to get on potential acquisitions? Are you looking at larger deals and getting close to potentially the finish line for maybe closing something this year? I'm just curious about your thoughts on the M&A environment overall. Yeah,

Speaker Change: That make things more attractive on the M&A front are there better pricing that you're able to get on potential acquisitions are you looking at larger deals.

Speaker Change: Getting close to potentially the finish line for maybe closing something this year I I'm just curious your thoughts on the M&A environment overall.

Brian F. Coleman: Yeah, we won't comment about exact time. But your assumption that, let's say, folks could consider they have a pot of gold because, let's say, pricing in 2022 was 40% higher than where we are today, certainly has come back to earth. So I do think your assumption that the negotiation is, let's say, slightly more favorable today than if we had executed something, say, two years ago or so. So the opportunities are there.

Speaker Change: Yeah, we won't comment about exact timing, but your assumption that let's say.

Speaker Change: Folks could consider they have a pot of gold because let's say pricing in 2022 was 40% higher than where we are today certainly they've come back to Earth.

Speaker Change: So I do think your assumption that the negotiation is lets see slightly more favorable today than if we had executed something say two years ago or so so the opportunities are there.

Brian F. Coleman: The areas that we've always talked about are reclaimers. But as it relates to reclaimers, generally speaking, there would be fewer opportunities and lower dollars. There may be opportunities in distribution. They would tend to, again, be few in number, but higher dollars. And then I think the wide open space for acquisitions is in the contractor space.

Speaker Change: The areas that we've always talked about our reclaimer's.

Speaker Change: But as it relates to Reclaimer's generally speaking there would be fewer number and lower dollars. There may be opportunities in distribution. They would tend to again be fewer number but higher dollars.

Speaker Change: And then I think the wide open space for acquisitions is in the contractor space.

Ryan Ronald Sigdahl: Thanks for clarifying on that. And then, just for context, I know we're kind of only a month into what is typically the company's strongest quarter here in 2Q. But some of the headwinds get a little bit better. I know pricing may be a little bit softer. But if you just kind of think about it contextually, where pricing is, in the first quarter, revenue was down around 15% year over year, including that DLA contract headwind and pricing being down around 20%.

Speaker Change: Thanks for clarifying.

Speaker Change: And then.

Speaker Change: Just for context, I know, we're kind of only a month into what is typically the company's strongest quarter here in <unk>, but some.

Speaker Change: Some of the headwinds get a little bit better I know pricing, maybe a little bit softer, but it can you just kind of think about it contextually where pricing is in the first quarter right revenue was down around 15% year over year included that DLA contract headwind and pricing being down around 20%.

Ryan Ronald Sigdahl: Is it fair to assume that when we're looking at 2Q on an apples-to-apples basis, at least based on how things are today, that you'd see pricing down, but maybe it's down more like 10% to 15% instead of 15% plus, just because the comps are a little bit better in 2Q of 23 versus 1Q?

Speaker Change: Fair to assume that when.

Speaker Change: When we're looking at <unk> on an apples to apples basis at least based on how things are today that you'd see pricing down, but maybe it's down more like 10% to 15% instead of 15% plus just because the comps are a little bit better in <unk> of 23 versus <unk>.

Brian F. Coleman: You're exactly right. Going back to 23, we started the year much higher than we started this year, but probably in about June of 23, we were seeing those $8 pound prices that continued probably till about September-ish. And then we started to see a slight uptick getting closer to 10, but that 10 really didn't kick in until September-ish, almost no material impact on Q3, had more of an impact on Q4.

Speaker Change: You are exactly right.

Speaker Change: Going back to 'twenty three we started the year much higher than we started this year, but probably in about June of 'twenty. Three we were seeing those $8 pound prices that continued probably till about September ish, and then we start to see a slight uptick getting closer to 10.

Speaker Change: But that.

Speaker Change: 10 really didn't kick in until September ish, almost no material impact to Q3 had more of an impact on Q4.

Ryan Ronald Sigdahl: That's it for me. Thanks, guys. I'll hop back in the queue.

Speaker Change: That's it for me Thanks, guys I'll hop back in the queue.

Speaker Change: Well, thank you too I appreciate it.

Operator: If there are any remaining questions, please indicate so by pressing star 1. The next question comes from Austin Moeller with Canaccord. Please proceed.

Speaker Change: If there are any remaining questions. Please indicate so by pressing star one. The next question comes from Austin Moeller with Canaccord. Please proceed.

Austin Nathan Moeller: Hi, good afternoon, Brian and Nat. My first question here is, what is the latest that you're hearing from the DLA on the potential for more advanced procurement in the second half? I mean, it sounds like they're currently purchasing at the rates that you expected in the first quarter so far, and you expect that run rate. But I guess there's opportunity there for improvement in the second half, but I guess what have they communicated to you?

Austin Nathan Moeller: Hi, good afternoon, Brian and that.

Austin Nathan Moeller: My first question here.

Austin Nathan Moeller: What is the latest you're hearing from the DLA on the potential for more advanced procurement in the second half I mean, it sounds like they're currently purchasing at the rate you expected in the first quarter, so far and do you expect that run rate, but I.

Speaker Change: I guess, there's the opportunity there for improvement in the second half, but I guess what have they communicated deal.

Brian F. Coleman: Unfortunately, there isn't a lot of visibility and or communication because the contract is constructed as an indefinite quantity. So that's why we had to make an estimate on our side of what we thought might be more surge related or less potential recurring in the 24 year. But to your point, and as we tried to say before, it doesn't mean we won't see some of that come back in the 24 year, but we were trying to, let's say, level set expectations that, let's say, a 32, 33 million run rate on an annual basis, while higher than it used to be at around 25 million, it's less likely that we would see it in the 40 to 50 million as we did in 2023.

Speaker Change: Unfortunately, there isn't a lot of.

Speaker Change: Visibility <unk> communication because the contract is constructed as an indefinite quantity.

Speaker Change: So thats why we had to make an estimate on our side of what we thought might be more surge related or less potential recurring in the 24 year.

Speaker Change: But to your point and as we tried to say before it doesn't mean, we won't see some of that come back in the 24 year, but we were trying to let's say level set expectations that let's say at $32 million to $33 million.

Speaker Change: Run rate on an annual basis, while higher than it used to be at around 25 billion.

Speaker Change: It is less likely that we would see it in the $40 million to $50 million as we did in 2023.

Austin Nathan Moeller: Okay, that's helpful. And then just to follow up, do you expect that the tightening of HFC supply this year combined with the requirements under the refrigerant management rule for reclaimed in certain industrial units and other new units to be what's really needed to permanently drive prices higher, just given where that inventory stockpile is at?

Speaker Change: Okay. That's helpful. And then just a follow up do you expect that the tightening of HFC supply. This year combined with the requirements under the refrigerant management role for reclaimed and certain industrial units and other other new units are shipped.

Speaker Change: What's really needed to permanently drive prices higher just given where that that.

Speaker Change: Inventory stockpiles that.

Brian F. Coleman: Well, we always look at the stockpile as a one-time event. You know, once the stockpile is sold, it's gone. And back to the current year, we do believe that the 40% overall reduction, or 30% further from where we were last year, does create a drawdown on that stockpile. But does it use up all that stockpile, or not in the 24-year period? That's the difficult thing to predict. So you have that particular element.

Speaker Change: Well, we always look at the stockpile that it's a one time event once the stockpile has sold its gone.

Speaker Change: And back to the current year, we do believe that the 40% overall reduction or 30% further from where we were last year.

Speaker Change: Those create a draw down on that stockpile.

Speaker Change: Does it use up all of that stockpile or not in the 24, Europe, that's a difficult thing to predict.

Speaker Change: So you have that particular element, but then as it relates to the refrigerant management rule, then again, depending on how the final rule comes out.

Brian F. Coleman: But then, as it relates to the refrigerant management rule, and again, depending on how the final rule comes out, once we start to get into a situation where there's a mandate for the use of reclaims, then we believe there is a potential departure from pricing all refrigerants, irrespective of Reclaim or Virgin, and that possibly Reclaim, because it will have demand, may be in a position to be priced slightly Certainly, from an environmental footprint point of view, Reclaim is more valuable than Virgin if you want to measure an ESG component to this because, under the American Carbon Registry, Reclaim refrigerants have about one-tenth the carbon footprint.

Speaker Change: Once we start to get into a situation, where there is a mandate for the use of reclaim.

Speaker Change: Then we believe there is a potential departure of pricing all refrigerants.

Speaker Change: Irrespective of reclaim or Virgin.

Speaker Change: And that possibly reclaim because it will have a demand may be in a position to be priced slightly higher certainly from an environmental footprint point of view reclaim is more valuable than Virgin if you want to measure and ESG component to this because under the American carbon registry.

Speaker Change: Reclaim refrigerants have about 110th the carbon footprint.

Brian F. Coleman: So if you want to calculate that delta and put a value on carbon, you could certainly put a value on Reclaim refrigerants should be priced higher as well. So part of the calculus to redetermine when we expect to be able to achieve, for example, a $400 million revenue target goes back to, in some respects, how the EPA implements that refrigerant management rule. Now one of the things that we suggested, which doesn't mean the DEPA will do it, but they did offer a comment, is to initiate the reclaim mandates earlier.

Speaker Change: So if you want to calculate that delta and put a value on carbon you could certainly put a value on <unk>.

Speaker Change: Claim refrigerants should be priced higher as well.

Speaker Change: Part of the calculus to re determine.

Speaker Change: When we expect to be able to achieve for example, a 400 million dollar revenue target goes back to in some respects, how the EPA implements that refrigerant management rule.

Speaker Change: Now one of the things that we suggested doesn't mean that the EPA will do it but.

Speaker Change: But they did offer comment is to initiate.

Speaker Change: Reclaim mandates earlier.

Brian F. Coleman: But it started at a lower percentage. So the way the proposed rule was constructed, the EPA started with 100% reclaimed demand use in 2028. We suggest starting in 2025 and working your way up to 100% as an example. So when we see the final rule, we'll then be able to evaluate how we think the reclaim side of our business model, which is the most profitable side, generally our gross margin or profit profile on the sale of a pound of reclaim is twice as great as compared to Virgin, and how that will help impact profitability and revenue growth.

Speaker Change: But started a lower percentage so the way the proposed rule was.

Speaker Change: Constructed.

Speaker Change: <unk> started with 100% demand reclaimed demand use in 2028, we suggested start in 'twenty five and work your way up to that 100% as an example, so when we see the final rule will then be able to evaluate.

Speaker Change: How we think the reclaim side of our business model, which is the most profitable side generally our gross margin or profit profile on the sale of a pound of reclaim is twice as great as compared to Virgin how that will help impact our profitability and revenue growth.

Austin Nathan Moeller: Great, thanks for the caller.

Speaker Change: Great. Thanks for the color.

Operator: Okay, next, we have Jerry Sweeney with Roth Capital. Please proceed.

Speaker Change: Okay up next we have Gerry Sweeney with Roth capital. Please proceed.

Gerard J. Sweeney: Good afternoon, Brian and Nat. Thanks for taking my call.

Gerard J. Sweeney: Good afternoon, Brian and Matt Thanks for taking my call.

Brian F. Coleman: Hello, good afternoon.

Gerard J. Sweeney: Hello, Good afternoon.

Gerard J. Sweeney: Just a follow-up question on acquisitions. But, you know, obviously, you discussed what we claim as distributors.

Gerard J. Sweeney:

Gerard J. Sweeney: Follow up question on acquisitions most of my other questions have been answered but.

Gerard J. Sweeney: Obviously, you just discussed we claim is distribution.

Gerard J. Sweeney: Contractors.

Gerard J. Sweeney: If you had your choice, you know, where would you think the best strategic option would be for Hudson? From my perspective, I would think you would want to be looking at the contractor space, and I know there's different dynamics around, you know, what comes first, but I'm just curious as to where you think it would be.

Gerard J. Sweeney: If you had your choice.

Gerard J. Sweeney: Or would you think the best.

Gerard J. Sweeney: Option would be strategically for Hudson.

Gerard J. Sweeney: From my perspective, I would think you would want to be looking at the contractor space and I know there's different dynamics.

Gerard J. Sweeney: Dynamics around what comes first but I'm just curious as to where you think would be best for the strict strategic position.

Brian F. Coleman: That's sort of a difficult question to answer. Each potential bucket has opportunities. But really, again, it goes back to our overall acquisition strategy. We've never tried to acquire anyone or anything and rely on synergies or rely on our overall ability to absorb, you know, overhead or whatever the case may be. We've always tried to look at acquisitions in the context of one-on-one is more than two or that there's a growth strategy associated with that particular target.

Speaker Change: That's sort of a difficult question to answer.

Gerard J. Sweeney: Each each potential bucket has opportunities, but really again it goes back to our overall acquisition strategy.

Gerard J. Sweeney: We've never tried to acquire anyone or anything.

Gerard J. Sweeney: And rely on synergies or rely on overall ability to absorb.

Gerard J. Sweeney: Overhead or whatever the case may be we've always tried to look at acquisitions in the context of 101 has more than two or that there is a growth strategy associated with that particular target.

Brian F. Coleman: And so, like we've said before, we want to look at their customer base and their offerings, and understand if we could apply their offerings to our customer base or, more often than not, add our offerings to their customers and then drive growth that way. And ultimately, we've talked about this many times, if you really go back and look at how we did the air gas acquisition, that was exactly the proposition.

Gerard J. Sweeney: And so like we've said before.

Gerard J. Sweeney: For that we want to look at their customer base.

Gerard J. Sweeney: And their offerings and understand if we could apply their offerings to our customer base.

Gerard J. Sweeney: Or more.

Gerard J. Sweeney: More times than not.

Gerard J. Sweeney: And our offerings to their customers and then drive growth that way.

Gerard J. Sweeney: And ultimately we talked about this many times if you really go back and look at how we did the airgas acquisition that was exactly the proposition airgas was mainly selling hfcs. We knew the long term opportunity was hfcs, we knew there would be significant price growth of HFC, but we're buying debt EBITDA based on two.

Brian F. Coleman: Air gas was mainly selling HFCs, so we knew the long-term opportunity was HFCs. We knew there would be significant price growth in HFCs, but we were buying that EBITDA based on $2 and $3 pricing for HFCs, which we are now at least seeing $8, and we thought we would see it higher than it is today. So that was part of the strategy. But another part of that strategy was that they really weren't procuring recovered gas from that customer base, whereas generally, for our historical customer base, we do a buy and sell relationship.

Gerard J. Sweeney: And $3 pricing for Hfcs, which we know at least theyre seeing $8 that we thought we would see it higher than it is today. So that that was part of the strategy and also part of that strategy was that they really weren't.

Gerard J. Sweeney: Procuring recover gas from that customer base, whereas generally our historical customer base, we do buy and sell relationship and so that we felt that it was an opportunity to be able to acquire more gas as well. So that's how we're going to look at any and all acquisition going forward irrespective of what bucket the RIN and we do think that theres.

Brian F. Coleman: And so we felt that it was an opportunity to be able to acquire more gas as well. So that's how we're going to look at any and all acquisitions going forward, irrespective of what bucket they're in. And we do think that there's going to be opportunities for acquisitions that will fit that growth model.

Gerard J. Sweeney: Going to be opportunities for acquisitions that will fit that growth model.

Gerard J. Sweeney: I gotcha. All right. That's it for me. I appreciate it.

Speaker Change: Okay, I got you alright.

Speaker Change: Okay.

Speaker Change: That's it for me I appreciate it thank you.

Speaker Change: Well, thank you Jackie.

Operator: Okay, we have a follow-up coming from Ryan Sigdahl with Craig Hallam. Please proceed.

Speaker Change: Okay, we have a follow up coming from Ryan <unk> with Craig Hallum. Please proceed.

Ryan Ronald Sigdahl: Hey, just one follow-up. There are a lot of questions around M&A, but with your stock at this valuation, I guess why not just buy back your own stock instead?

Ryan: Hey, just one follow up.

Ryan: Questions around M&A, but with your stock at this valuation I guess why not just buyback your own stock instead.

Brian F. Coleman: Again, we could do that, but we've always said that that's sort of the third option. The first option we always talked about was inventory, but I think we mentioned this in the year-end earnings call. We don't see the need for more dollars in inventory, let's say, when you compare what we believe the inventory balance to be at December 31st of 2024 compared to 23. So that's kind of, let's say, locked down from a working capital point of view.

Ryan: Again, we could do that but we've always said that that's sort of the third option. The first option. We always had talked about is inventory, but I think we mentioned this.

Ryan: The year end earnings call, we don't see the need for more dollars in inventory, let's say when you compare what we believe the inventory balance to be at December 31.

Ryan: 2024, compared to <unk> 23, so that's kind of let's say lockdown from a working capital point of view. So then you're back to two remaining buckets acquisitions and buyback.

Brian F. Coleman: So then you're back to two remaining buckets, acquisitions, and buyback. For acquisitions, we still believe the return on those dollars should be far greater than any return we would have on buying back our stock. Now, our current ABL precludes us from buying back our stock, but we do believe if we went to our lender, we would be able to get a waiver for that. But at the end of the day, at the moment, we're, let's say, focused more on acquisition opportunities.

Ryan: Acquisitions, we still believe the return on those dollars should be far greater than any return we would have on buying back our stock.

Ryan: Our current <unk>.

Ryan: ABL precludes us from buying back our stock, but we do believe if we went to <unk>.

Ryan: Our lender, we would be able to get a waiver for that but.

Ryan: But at the end of the day at the moment, we are let's say focus more on the acquisition opportunities.

Ryan Ronald Sigdahl: Just a clarification, you don't have anything drawn on the revolver, but it still restricts you from buying back stock?

Speaker Change: Just a clarification you don't have anything drawn on the revolver, but it still restrict you from Brian buying back stock.

Brian F. Coleman: Correct. Correct.

Speaker Change: Correct correct. So unfortunately, the way any of these.

Brian F. Coleman: So, unfortunately, the way any of these ABLs are constructed, they're encumbering your assets irrespective of your borrowings, and typically, the way these are constructed is they preclude any cash outflows that are not going to the business itself. And so that's typically an ABL will, even though you have no outstanding balance, restrict you both on dividends and buybacks. But, as I said, I think there's an opportunity, if we choose, to go to the lender and get a waiver for that.

Speaker Change: <unk> are constructed they are encumbering your assets irrespective of your borrowings.

Speaker Change: And typically the way these are constructed as they preclude any cash outflows that are not going to the business itself and so that's typically in <unk>.

Speaker Change: Bo will even though you have no outstanding balance will restrict you bolt on dividends and buybacks, but as I said I think there is an opportunity if we choose to go to the lender and get a waiver for that.

Ryan Ronald Sigdahl: I appreciate the clarification. Thanks, guys.

Speaker Change: I appreciate the clarification thanks guys.

Speaker Change: Thank you.

Operator: We have reached the end of the question and answer session, and I will now turn the call over to management for a closing remark.

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

Brian F. Coleman: 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. Sorry, F for the second quarter results. Sorry about that, and have a good night, everybody.

Speaker Change: Thank you operator, I'd like to thank our employees for their continued support and dedication to our business.

Speaker Change: And both our long time shareholders and those that recently joined us for their support.

Speaker Change: We look forward to speaking with you after the first quarter results.

Speaker Change: Sorry.

Speaker Change: After the second quarter results, sorry about that and have a good night everybody.

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

Speaker Change: This concludes today's conference and you may disconnect your lines at this time.

Speaker Change: Thank you for your participation.