Q3 2024 Hudson Technologies Inc Earnings Call
Operator: With that out of the way, I will turn the call over to Brian Coleman.
And the call over to Brian Coleman go ahead, Brian.
Brian Coleman: Well, good evening, and thank you for joining us. As we mentioned, on our second quarter earnings call, the third quarter of 2024, included several industry developments, including the EPA's issuance of the final refrigerant management rule, and the release of the 2023 reclamation and inventory data collected from industry participants as of December 31, 2023. Additionally, the third quarter marks the close of our nine-month selling season, and we have some pricing data to share. We'll get into the industry data points and our outlook moving forward a little later in the call, but first I will provide some color around our quarterly results.
Brian Coleman: Well good evening and thank you for joining us as we mentioned on our second quarter earnings call. The third quarter of 2024 included several industry developments, including the Epa's issuance of the final refrigerant management rule.
Operator: Go ahead, Brian.
And the release of the 2023 reclamation and inventory data collected from industry participants as of December 31, 2023.
Brian Coleman: Additionally, the third quarter marks the close of our nine month selling season.
And we have some pricing data to share.
We'll get into the industry data points and our outlook moving forward a little later in the call, but first I will provide some color around our quarterly results.
Brian Coleman: As you know, the 2024 cooling season was challenging and the third quarter revenues decreased primarily related to decreased prices for certain refrigerants, as well as slightly lower revenue from our DLA contract as compared to the third quarter of last year. To provide some perspective around the pricing dynamic, at the close of the third quarter of 2024, HSE prices had declined an additional 20 percent from the pricing levels we reported on our second quarter 2024 call to approximately $6 per pound. There are several types of HFCs, so the pricing for any one might be different than others.
Brian Coleman: As you know the 2024 cooling season was challenging in the third quarter revenues decrease primarily related to decreased prices for certain refrigerants.
Brian Coleman: As well as slightly lower revenue from our DLA contract as compared to the third quarter of last year.
Brian Coleman: To provide some perspective around the pricing dynamic at the close of the third quarter of 2020 for HFC prices had declined an additional 20% from the pricing levels, we reported on our second quarter 2024 call.
Approximately $6 per pound.
Brian Coleman: There are several types of hfcs, so the pricing for any one might be different than others. When we talk about the price of Hfcs were generally focused on the price of HFC <unk>.
Brian Coleman: When we talk about the price of HFCs, we're generally focused on the price of HFC-410A, which represents about 70% of the total aftermarket demand for HFCs. By way of context, HFC4 today was the most price competitive HFC during the sales season while other HFC pricing was not as volatile. While this season's pricing dynamic is disappointing in the near term, pricing trends are only one element of our business model, and we remain confident that the ongoing phase-out of HFCs will ultimately move prices higher as demand for HFC refrigerants begins to outstrip supply. We've said many times that we don't believe it's a question of if HFC pricing increases.
Which represents about 70% of the total aftermarket demand for Hfcs bye.
By way of context HFC for today was the most price competitive HFC. During this sales season, while other HFC pricing was not as volatile.
While this season's pricing dynamic is disappointing in the near term pricing.
Brian Coleman: Pricing trends are only one element of our business model and we remain confident that the ongoing phase out of Hfcs will ultimately move prices higher as demand for HFC refrigerants begin to outstrip supply.
We've said many times that we don't believe it's a question of if HFC price pricing increases it's more question of when HFC pricing will increase.
Brian Coleman: It's more a question of when HFC pricing will increase. Additionally, with our longstanding industry relationships and reclamation capabilities, we are well positioned to fill the expected increase in demand for reclaimed refrigerants as virgin production is curtailed by the ongoing HSC phase-out. We are committed to executing a long-term growth strategy to capitalize on HSE phase-down and the expected corresponding growth and demand for reclaimed refrigerant. While pricing pressure in the quarter impacted our gross margin performance, we achieved solid profitability. However, with our visibility today, we are adjusting our expectations for full-year revenue, which we expect to be at the low end of our prior guidance range, and a full-year gross margin of approximately 28 percent.
Additionally, with our long standing industry relationships and reclamation capabilities, we are well positioned to fill the expected increase in demand for reclaim refrigerants as Virgin production is curtailed by the ongoing HFC phase out.
Brian Coleman: We are committed to executing our long term growth strategy to capitalize on HFC phasedown and the expected corresponding growth in demand for reclaim refrigerants.
While pricing pressure in the quarter impacted our gross margin performance, we achieved solid profitability.
Brian Coleman: However, with our visibility today, we are adjusting our expectations for full year revenue, which we expect to be at the low end of our prior guidance range and our full year gross margin of approximately 28%.
Brian Coleman: It should be noted that the fourth quarter gross margin is expected to be traditionally lower than the Q3, which is consistent with last year due to lower volumes related to seasonality.
Brian Coleman: It should be noted that the fourth quarter gross margin is expected to be traditionally lower than the Q3, which is consistent with last year due to lower volumes related to seasonality.
Brian Coleman: As many of you know, the cooling and refrigerant industry has been continuously transitioning to drive the development and use of lower GDP refrigerants and equipment. During the third quarter, the EPA issued its final refrigerant management rule, which is the third important pillar from the AIM Act, with a primary focus on reducing leak rates and promoting growth and reclamation. Among other directives, the final rule mandates the use of reclaimed refrigerants for servicing certain sectors of the market beginning in 2029, which we view as a positive step in driving the industry's broader use of reclaimed refrigerants. Our industry does not have reclamation without a technician choosing to recover the refrigerant during a service call or at end of life for the equipment.
Brian Coleman: As many of you know the cooling and refrigerant industry has been continuous continuously transitioning to drive the development and use of lower GDP refrigerants and equipment.
During the third quarter. The EPA issued its final refrigerant management rule, which is the third important pillar from the aim act with a primary focus on reducing leak rates and promoting growth in reclamation.
Brian Coleman: Among other directors the final rule mandates the use of reclaim refrigerants for servicing certain sectors of the market beginning in 2029.
Brian Coleman: Which we view as a positive step in driving the industry's broader use of reclaim refrigerants.
Brian Coleman: Our industry does not have reclamation without a technician choosing to recover the refrigerant during a service call or at end of life of the equipment hubs.
Brian Coleman: Hudson currently pays for recovery refrigerant and we have placed an emphasis on promoting best practices for recovery during technician training. We believe the implementation of a mandate for the use of reclaimed refrigerants establishes a message to technicians that the practice of venting refrigerants is not sustainable. The current install base of HFC equipment has a potential operational life of approximately 20 years. So if technicians want to serve their customers for the long run, then they must recover and not vent the refrigerant. This rule represents the first time in our history that creates a federal requirement for the mandatory use of reclaimed refrigerants in certain sectors.
Brian Coleman: Hudson currently pays for recovered refrigerant and we placed an emphasis on promoting best practices for recovery during technician training.
Brian Coleman: We believe the implementation of a mandate for the use of reclaim refrigerants establishes a mesh message to technicians that the practice of venting refrigerants is not sustainable.
Brian Coleman: Our current installed base of HFC equipment has a potential operational life of approximately 20 years.
Brian Coleman: So if technicians want to serve their customers for the long run than they must recover and not that the refrigerants.
Brian Coleman: This rule represents the first time in our history.
Brian Coleman: It creates a federal requirement for the mandatory use of reclaim refrigerants in certain sectors.
Brian Coleman: We are also seeing favorable legislative activity on a state-by-state basis, led by California, which is currently implementing laws to limit the sale and use of high-GUP refrigerants. and will also implement a mandate for the use of reclaimed refrigerants in state government buildings in 2025. New York and Washington State also have legislation pending, and more states are expected to follow. Additionally, the EPA recently provided industry reclamation data for 2023, which showed an increase of approximately 7% in the terms of all refrigerants reclaimed as compared to 2022. This includes CFCs, HCFCs, and HFCs. If we isolate HFCs, reclaimed pounds grew by approximately 20% in 2023 as compared to 2022.
Brian Coleman: We are also seeing favorable legislative activity on a state by state basis led by California, which is currently implementing <unk> to limit the sale and use of high <unk> refrigerants.
Brian Coleman: And we will also implement a mandate for the use of reclaim refrigerants in state government buildings in 2025.
New York and Washington State also have legislation pending in more states are expected to follow.
Brian Coleman: Additionally, the EPA recently provided industry reclamation data for 2023.
Brian Coleman: Which showed an increase of approximately 7% in the terms of all refrigerants reclaimed as compared to 2022.
Brian Coleman: This includes cfcs hcf's sees in Hfcs.
Brian Coleman: If we isolate hfcs reclaim pounds grew by approximately 20% in 2023 as compared to 2022.
Brian Coleman: So we're pleased to see the growth in Reclaim and we're committed to working with our industry partners to redouble our efforts to establish greater recovery practices that will drive meaningful increases in Reclaim activity in future years. DPA also chose to provide recovered pounds data by Reclaimer. which it has never previously provided. It should be noted that in this reporting, we are listed as the second largest in the covered pound. We are looking to get some more clarity around this data, but for years, recovered pounds have exceeded reclaimed by over two million pounds per year or by approximately 13 million pounds over the past five years.
Brian Coleman: So we're pleased to see the growth in reclaim and we're committed to working with our industry partners to redouble, our efforts to establish greater recovery practices that will drive meaningful increases in reclaim activity in future years.
Brian Coleman: DPA also chose to provide recovered pounds data by reclaimer.
Brian Coleman: Which is never previously provided.
Brian Coleman: It should be noted that in this reporting we are listed as the second largest and recovered pounds.
Brian Coleman: We are looking to get some more clarity around this data but for years recovered pounds have exceeded reclaim by over 2 million pounds per year or by approximately 13 million pounds over the past five years.
Brian Coleman: We believe individual organizations may have different approaches to the use of recovered pounds they report. Some will report recovered pounds that they will go on to reclamations, such as Hudson. Others may report recovered pounds, and they'll stockpile those pounds. Still others may report recovered pounds that they will destroy. Further complicating the data is that one reclaimer could purchase recovered pounds from another reclaimer that did not reclaim the pounds, but previously reported those pounds as recovered. In that scenario, two different reclaimers may be reporting the same pound twice. For the most part, Hudson only recovers pounds that we reclaim.
Brian Coleman: We believe individual organizations may have different approaches to the use of recovered pounds. They report.
Brian Coleman: Some will report recovered pounds that they will go on to reclamation such as Hudson.
Brian Coleman: Others May report recovered pounds and they'll stockpile those pounds.
Brian Coleman: Others May report recovered pounds that they will destroy.
Brian Coleman: Further complicating the data is that one reclaimer could purchase recovered pounds from another reclaimer that did not reclaim the pounds. The previously reported those pallets has recovered.
Brian Coleman: In that scenario two different reclaimer's may be reported in the same pound twice.
Speaker Change: For the most part Hudson only recovers pounds that we reclaim.
Brian Coleman: All that said, according to the EPA report, our total market share for HOC reclaimed pounds for 2023 is in the 20 percent plus range with R410A at approximately 25 percent. And for the moment, it's unclear whether a certain amount of the recovered HFC stockpile from the prior period is finally being reclaimed, thereby inflating the 2023 total reclaimed pounds from prior year activity. If that was the case, then Hudson's activities would not include any one-time windfall for the processing of stockpiled recovered refrigerants. While in the past, tracking the recovered pounds was never a concern of Hudson.
Brian Coleman: All that said according to the EPA report, our total market share for HFC reclaim pounds for 2023 is in the 20% plus range with our <unk> at approximately 25%.
Brian Coleman: And for the moment is unclear whether a certain amount of the recovered HFC stockpile from the prior periods is finally being reclaimed thereby inflating the 2023 total reclaim pounds from prior year activity.
Brian Coleman: If that was the case then Hudson's activities would not include any onetime windfall for the processing of stockpile recovery refrigerant.
Brian Coleman: While in the past tracking recovered pounds was never a conservative Hudson.
Brian Coleman: We will be spending more time analyzing this recovered data in the context of what we're seeing in the marketplace to get a clearer picture of the current recovered to reclamation data.
Brian Coleman: We will be spending more time analyzing this recover data in the context of what we're seeing in the marketplace to get a clearer picture of the current recovered two reclamation data.
Brian Coleman: Finally during the third quarter. The EPA also gave a snapshot of where refrigerant inventory levels were as of December 31 2023.
Brian Coleman: Finally, during the third quarter, the EPA also gave a snapshot of where refrigerant inventory levels were as of December 31st, 2023. Year-end inventory levels give us a sense of how the ongoing limitations of the virgin consumption are impacting supply. As we move through any phase-down, we would anticipate that production limitations will begin to limit year-end inventory as demand begins to surpass supply. At December 31st, 2022, total reported HSE inventory was 388 million metric tons of CO2e. at the end of the year when HSE consumption had been curtailed to 90% of the cap. At December 31st, 2023, the second year of consumption at 90% of the cap, HSC inventory levels closed the year at 378 million metric tons of CO2e.
Brian Coleman: Year end inventory levels give us a sense of how the ongoing limitations of the Virgin consumption are impacting supply.
Brian Coleman: As we move through any phased out and we would anticipate that production limitations will begin to limit yearend inventory as demand begins to surplus surpassed supply.
Brian Coleman: At December 31, 2022, total reported HFC inventory was 388 million metric tons of Cotwo.
Brian Coleman: At the end of the year when HFC consumption.
Brian Coleman: Curtailed to 90% of the Caf.
Brian Coleman: At December 31, 2023, the second year of consumption at 90% of the cap.
Brian Coleman: HFC inventory levels closed the year at 378 million metric tons of Cotwo.
Brian Coleman: While inventory levels are moving in the right direction, we are a bit disappointed by the rate of decline in inventory levels, which would eventually lead to a supply-demand imbalance as consumption allowances met demand in 2022 and 2023. In 2024, consumption allowances were reduced to provide for 60% of the original cap. And we are optimistic that we'll see a lowering in inventory balances as the end of this year. But we are concerned that the combination of inventory levels with the annual consumption allowances will not decline in the 2025 to 28 period sufficiently relative to demand in those periods, unless a petition is filed with the EPA to lower consumption allowances in those years.
Brian Coleman: While inventory levels are moving in the right direction, we are a bit disappointed by the rate of decline in inventory levels, which would eventually lead to a supply demand imbalance as consumption allowances met demand in 2022 and 'twenty three.
Brian Coleman: In 2020 for consumption allowances were reduced to provide for 60% of the original cap.
Brian Coleman: And we're optimistic that we'll see a lowering in inventory balances as the end of this year.
Brian Coleman: But we are concerned that the combination of inventory levels with the annual consumption allowances will not decline in the 2025 to 2008 period sufficiently relative to demand in those periods unless a petition is filed with the EPA to lower consumption allowances in those years.
Brian Coleman: The primary reason for this observation is that next year, we're entering a period of OEM demand shift to lower GWP systems, and they therefore need less metric tons of CO2e of refrigerants to meet that demand.
Brian Coleman: The primary reason for this observation is that next year, we're entering a period of OEM demand shift to lower GDP systems, and therefore need less metric tons of cotwo of refrigerants to meet that demand.
Brian Coleman: In early September, Hudson partnered with the Rocky Mountain Institute, or RMI, to publish a report that found that greenhouse gas emissions can be reduced by up to 70 percent on a per-pound basis through the use of reclaimed refrigerant versus producing and using manufactured virgin R410A refrigerant. As the availability of HSCs decreases to meet EPA phase-out goals, reclamation will be essential to meeting demand for existing systems, limiting market disruption. ensuring a smooth transition for consumers and providing a significant reduction to GWP. We are pleased to have had the opportunity to support RMI in publishing their report, which illustrates the significant role refrigeration reclamation plays in protecting our environment.
Brian Coleman: In early September Hudson partnered with the Rocky Mountain Institute or Rmi.
Brian Coleman: To publish a report that found that greenhouse gas emissions can be reduced by up to 70% on a per pound basis through the use of reclaim refrigerants versus producing and using new manufactured Virgin R. <unk> refrigerant.
Brian Coleman: As the availability of Hfc's decreases to meet EPA phase out goals reclamation will be essential to meeting demand for existing systems limited.
Brian Coleman: Limiting market disruptions, ensuring a smooth transition for consumers and providing a significant reduction to GW P.
Brian Coleman: We are pleased to have had the opportunity to support Rmi and publishing their report, which illustrates the significant role refrigeration reclamation plays in protecting our environment.
Brian Coleman: We also believe that this report will stimulate users of refrigerants to choose Reclaim Refrigerant over Virgin on a voluntary basis. in addition to any regulatory mandates to achieve emissions goals. Hudson is a leading provider of wall refrigerants, and we remain focused on achieving the high operational execution that ensures we are meeting our customer needs through refrigerant sales, as well as through our servicing and reclamation capabilities. Through every evolution in our industry, and we've been through several, our primary goal has been to facilitate a smooth transition for our customers while also being a proponent for sustainable refrigerant management as our industry moves to more efficient equipment and lower GDP refrigeration.
Brian Coleman: We also believe that this report will stimulate users of refrigerants to choose reclaim refrigerant over Virgin on a voluntary basis. In addition to any regulatory mandates to achieve emissions goals.
Brian Coleman: Hudson is a leading provider of all refrigerants and we remain focused on achieving the high operational execution and ensures we are meeting our customer needs through refrigerant sales as well as through our servicing our reclamation capabilities.
Brian Coleman: Through every evolution of our industry and we've been through several of harmony goal has been to facilitate a smooth transition for our customers. While also being a proponent for sustainable refrigerant management as our industry moves to more efficient equipment and lower GDP refrigerator.
Brian Bertaux: Now I'll turn the call over to Brian Bertaux to review our third quarter financial results.
Speaker Change: Now I will turn the call over to Brian Brito to review, our third quarter financial results go ahead, Bryan. Thank you, Brian and good evening, everybody now I'll turn to the review of our third quarter 2024 financial results with comparisons to the 2023 third quarter results Hudson.
Operator: Go ahead, Brian.
Brian Bertaux: Thank you, Brian, and good evening, everybody. Now I'll turn to the review of our third quarter 2024 financial results with comparisons to the 2023 third quarter results. Hudson recorded $61.9 million in revenue in the 2024 quarter, a 19% decrease from last year's quarter. The decrease was related to lower refrigerant market prices and lower revenue from the company's DLA contract. As a reminder, our 2023 DLA revenue was higher than normal due to certain non-recurring purchases making for a tough year-over-year comp. Gross margin was 26% for the 2024 quarter, compared to 40% in last year's quarter, reflecting the lower refrigerant market price.
Bryan: Hudson recorded $61 $9 million in revenue in the 2024 quarter at 19% decrease from last year's quarter.
Bryan: Increase was related to lower refrigerant market prices and lower revenue from the company's DLA contract.
Bryan: As a reminder, our 2023 DLA revenue was higher than normal due to certain nonrecurring purchases, making for a tough year over year comp.
Brian Coleman: Gross margin was 26% for the 2024 quarter compared to 40% in last years quarter, reflecting the lower refrigerant market prices.
Brian Bertaux: SG&A was $8.1 million this quarter compared to $6.8 million in last year's quarter. The increase in SG&A includes higher personnel costs and professional fees. We recorded operating income of $7 million in the 2024 quarter compared to $23.1 million in last year's quarter. We recognize $2.3 million in non-recurring other income in the 2024 quarter, which was primarily related to a litigation settlement. company recorded net income of $7.8 million or 17 cents per diluted share in the 2024 quarter. compared to $13.6 million or $0.29 per diluted share in last year's quarter. We strengthened our unlevered balance sheet ending the quarter with $56.5 million in cash and no debt.
Brian Coleman: SG&A was $8 $1 million this quarter compared to $6 8 million in last year's quarter.
Brian Coleman: The increase in SG&A includes higher personnel costs and professional fees.
Brian Coleman: We recorded operating income of $7 million in 2024 quarter compared to $23 $1 million in last year's quarter.
Brian Coleman: We recognized $2 $3 million of non recurring other income in the 2024 quarter, which was primarily related to a litigation settlement.
Brian Coleman: The company recorded net income of $7 8 million or <unk> 17 per diluted share in the 2024 quarter.
Brian Coleman: Compared to $13 $6 million 29 per diluted share in last year's quarter.
Brian Coleman: We strengthened our unlevered balance sheet, ending the quarter with $56 $5 million in cash and no debt.
Brian Bertaux: As previously reported, our capital allocation strategy is focused on organic and strategic growth, as well as share repurchases. During the third quarter, we repurchased $2.6 million in common stock. In support of our capital allocation strategy, the company's board of directors recently approved an increase to our share repurchase program, thereby doubling the amount of repurchases that we can make. Hudson may now purchase up to $20 million of shares of its common stock, consisting of up to $10 million during each of calendar year 2024 and 2025.
Brian Coleman: As previously reported our capital allocation strategy is focused on organic and strategic growth as well as share repurchases during.
Brian Coleman: During the third quarter, we repurchased $2 $6 million in common stock.
Brian Coleman: In support of our capital allocation strategy. The company's board of Directors recently approved an increase of our share repurchase program, thereby doubling the amount of repurchases that we can make.
Brian Coleman: Hudson May not purchase up to $20 million of shares of its common stock consisting of up to $10 million during each of calendar year 2024 and 2025.
Brian Bertaux: Finally, I would like to reiterate our expectations for four-year revenue to be at the low end of our prior guidance range, with four-year gross margin of approximately 28%, noting that fourth quarter gross margin is typically a low mark for the year due to lower volumes related to seasonality.
Brian Coleman: Finally, I would like to reiterate our expectations for full year revenue to be at the low end of our prior guidance range with full year gross margin of approximately 28%.
Brian Coleman: Noting that fourth quarter gross margin is typically a low mark for the year due to lower volumes related to seasonality.
Brian Coleman: I will now turn the call back over to Brian. Thank you, Brian. I'd like to reemphasize that despite the challenging 2024 selling season, our view of the company's long term growth opportunity has not changed. As the ongoing HSE phase-down continues, we are confident that HSE pricing will ultimately move higher. We also believe that higher pricing of HFCs, along with the mandated use of reclaimed refrigerant, will advance the industry's embrace of recovery and reclamation activity and create enhanced profitability in our business. Hudson has the longstanding customer base, national footprint, and proprietary reclamation technology to continue to grow our leadership role as our industry embraces new cooling technologies and refrigerants.
Speaker Change: I will now turn the call back over to Brian.
Brian Coleman: Thank you Brian.
Brian: I'd like to reemphasize that despite the challenging 2020 for selling season, our view of the company's long term growth opportunities has not changed.
Brian: As the ongoing HFC Phasedown continues we are confident that HFC pricing will ultimately move higher.
Brian Coleman: We also believe that higher pricing of hfcs, along with the mandated use of reclaim refrigerant will advance the industry's embrace of recovery and reclamation activity and create enhanced profitability in our business.
Brian Coleman: Hudson has the long standing customer base national footprint and proprietary reclamation technology to continue to grow our leadership role as our industry embraces new cooling technologies and refrigerants.
Brian Coleman: and we look forward to capitalizing on the opportunities ahead of us.
Brian Coleman: And we look forward to capitalizing on the opportunities ahead of us.
Operator: Operator, we'll 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 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 the star keys. One moment, please, while we poll for questions. Once again, please press star 1 if you have a question or a comment.
Speaker Change: Operator, we will 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.
Brian Coleman: May press star two if you'd like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your 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 a comment. The first question comes from Ryan <unk> with Craig Hallum. Please proceed.
Ryan Sigdahl: The first question comes from Ryan Sigdahl with Craig Hallam. Please proceed.
Ryan Sigdahl: Hey, Brian and Brian. Good afternoon. Yeah. You continue to reiterate, I guess, you expect pricing to move higher over time.
Ryan: Hey, Brian and Brian Good afternoon.
Ryan <unk>: You continue to reiterate I guess, you expect pricing to move higher over time, but Brian.
Brian Coleman: But Brian, you alluded to the ending 2023 inventory, which we agree with, was fairly lackluster, being down only 2% year over year, and likely needing a petition to the EPA to accelerate that phase-on. So I guess if we don't get that petition and the EPA to accelerate it, are we looking at lower prices for longer and probably not seeing the imbalance until we get that big step down in 2029? I mean, it's certainly a possibility. We don't know what 2024 will hold. The 2024 demand should have been similar to 2023. So we would expect some amount of reduction to that total inventory amount.
Speaker Change: Alluded to the ending 2023 inventory, which we agree with.
Speaker Change: What's fairly lackluster being down only 2% year over year.
Brian Coleman: Likely needing a petition to the EPA to accelerate that phase I. So I guess, if we don't get that that petition EPA to accelerate it when we're looking at lower prices for longer and probably not seen the imbalanced until we get that big step down in 2029.
Brian Coleman: I mean, thats certainly a possibility we don't know what 2024 will hold 2024 demand should have been similar to 2023. So we would expect some amount of reduction to that total inventory amount.
Brian Coleman: But back to, as I said in my prepared remarks, we're concerned that the allowance structure for 25 through 28 could be allowing for additional allowances relative to demand for those periods due to the shifting of the OEM demand on lower GDP refrigerants, which means they're going to use lower amounts of the metric ton of CO2e relative to a pound to pound comparison. So there's still pieces to the puzzle that we don't know, and certainly will know better going into next year.
Brian Coleman: But back to as I said in my prepared remarks, we're concerned that the allowance structure for 25 through 28.
Brian Coleman: Could be.
Brian Coleman: Wowing for additional allowances relative to demand for those periods due to the shifting of the OEM demand on lower GDP, refrigerants, which means theyre going to use lower amounts of a metric ton of <unk> realm.
Brian Coleman: Relative to a power to Pal comparison.
Brian Coleman: So there are still pieces to the puzzle that we don't know.
Brian Coleman: Certainly we will know better going into next year, but we do want to indicate our concern for that period, and we certainly would be supporting the concept of lowering the consumption allowances for the balance of.
Brian Coleman: But we do want to indicate our concern for that period, and we certainly would be supporting the concept of lowering the consumption allowances for the balance through the 28 period.
Brian Coleman: Through 2008 period.
Brian Coleman: Just to follow up, Brian, what I guess entails that petition process? Can you give us a little more color on that, what would need to happen? Well, think of it like a challenge to the EPA, someone would have to put forth a rationale as to why with specific evidence, and certainly possibly the inventory data would be that evidence for a reduction of the annual consumption allowances, even in light of the fact that they've already potentially issued those, meaning they prepare a rule for 24 to 28, which said they would keep the consumption allowances constant over time, it still could be challenged and then therefore amended.
Speaker Change: Just a follow up Brian what I guess entails that petition process can you give us a little more color on that would need to happen.
Brian: Well think of it like a challenge to the EPA someone would have to put forth a rationale as to why with specific evidence and certainly possibly the inventory data would be that evidence.
Speaker Change: For a reduction of the annual.
Speaker Change: <unk> allowances even.
Brian Coleman: In light of the fact that they've already potentially issued those meaning they prepare rule for $2004 28, which said they would keep the consumption allowances constant over time, it still could be challenged and then therefore amended.
Brian Coleman: When you look to Europe, Europe has gone through a process and in some instances have lowered the annual allowances relative to what the minimum level are. And back to this point, when you look at the chart that might be, you might find in our investor presentation, and you see the step down over the periods, that's the minimum that the EPA could do. They can, in fact, go lower, but in this instance, since they've already issued the 24 to 28 rule, a petition would be the methodology to seek a lowering of the annual consumption allowances.
Brian Coleman: When you look to Europe, Europe has gone through a process and in some instances have lowered the annual allowances relative to what the minimum level of R and back to this point when you look at the chart that might be you might find on our investor presentation, and you see the step down over the period.
Brian Coleman: That's the minimum that the EPA can do they can in fact go lower but in this instance, since they've already issued the 2020 rule a petition would be the methodology to see to seek a lowering of the annual consumption.
Brian Coleman: Very good. Moving over to USA Refrigerants, the acquisition you just closed, what are you seeing there from an integration standpoint? And then are you seeing what you hope to see from an accelerant on the recovery of refrigerant to fuel into your reclamation process? Well, the integration's going extremely well, and really on two fronts, where they're bringing in some new customers to sell refrigerants to, but also giving us additional sources to bring in reclaimed refrigerant. So we're seeing that working well on both fronts and some very good strategic sources of reclaimed refrigerant.
Speaker Change: Very good moving over to USA refrigerants the acquisition you just closed.
Speaker Change: What are you seeing there from an integration standpoint.
Speaker Change: And then are you seeing.
Speaker Change: What you hope to see from an accelerant on the recovery of refrigerant fuel into your reclamation process.
Speaker Change: While the integrations go in extremely well and really on two fronts, where they are bringing in some new customers to sell refrigerants too, but also giving us additional sources to bring in reclaim refrigerant. So.
Speaker Change: We're seeing that working well on both fronts and some very good strategic sources of reclaim refrigerant.
Brian Coleman: And maybe to add, we now are past the point of integration and really now including the strategies applied historically by USA to strategies to Hudson's existing customer base. So, one of the things that we had hoped for with regards to the air gas acquisition was with their extensive customer base to be able to grow our ability to receive more recovered gas. With the addition of the USA team, we're now being able to execute into the Hudson customer base, particularly that customer base that was acquired in the air gas acquisition. Thanks.
Speaker Change: And maybe to add.
Speaker Change: Now our past deploying of integration and really now, including the strategy's applied historically by USA two strategies, two hudson's existing customer base.
Speaker Change: So one of the things that we had hoped for with regards the airgas acquisition was with their extensive customer base to be able to grow our ability to receive more recovered gas.
Speaker Change: With the addition of the USA team, we're now being able to execute into the Hudson customer base, particularly that customer base that was acquired and the airgas acquisition.
Speaker Change: Thanks, and then one quick one.
Brian Bertaux: And one quick one. What was the litigation settlement gain related to? It was really related to a commercial dispute and settled at the end of the quarter.
Speaker Change: It was.
Speaker Change: Litigation settlement gain related to.
Speaker Change: It was really related to a commercial dispute.
Speaker Change: And settled.
Brian Coleman: At the end of the quarter.
Ryan Sigdahl: Turn it over to the others. Good luck, guys. Thank you.
Brian Coleman: Good luck guys. Thank.
Brian Coleman: Thank you.
Austin Moeller: The next question comes from Austin Moeller with Canaccord, please proceed. Hi, good evening. So just my first question here, it sounds like the depletion rate in the 2023 inventory has been slower than anticipated.
Speaker Change: The next question comes from Austin Moeller with Canaccord. Please proceed.
Speaker Change: Okay.
Austin Moeller: Hi, good evening.
Austin Moeller: So just my first question here it sounds like the depletion rate in the 2023 inventory has been slower than anticipated. So would you expect any uptick in pricing during that 2025 Q3 to.
Brian Coleman: So would you expect any uptick in pricing during that 2025 Q2 to Q3 cooling season, maybe like $1 to $2 per pound? It's very very difficult to prognosticate pricing and frankly when you reflect on this particular year's cooling season we saw a greater decline than we ever anticipated and so at some point we're going to hit a floor are we at the floor or not we don't know but back to let's say increases in price we think that it's important that we rely more on supply-demand economics as opposed to allowance holders acting in a particular way relative to price so the biggest price pressure HSC refrigerant is 410A it appears from the inventory data there's a significant amount of 125 and 32 and those are the two components that are necessary to build 410A so we are concerned that we're going to enter next year with similar pricing dynamics that we exited this year Okay, that's helpful.
Austin Moeller: Q2 to Q3 cooling season, maybe like one to $2 per pound.
Speaker Change: It's very very difficult to prognosticate pricing and frankly, when you reflect on this particular year's cooling season.
Speaker Change: We saw a greater decline than we ever anticipated.
Speaker Change: So at some point, we're going to hit a floor or are we at the floor or not we don't know.
Speaker Change: But back to let's say increases in price, we think that it's important that we rely more on supply demand economics as opposed to allowance holders acting in a particular way relative to price. So the biggest price pressure.
Speaker Change: C refrigerant is <unk>.
Speaker Change: It appears from the inventory data there is a significant amount of $1 25, and 32 and those are the two components that are necessary to build for today. So we are concerned that we're going to enter next year with similar pricing dynamics that we exited this year.
Speaker Change: Okay. That's helpful and when do you expect to see.
Brian Coleman: And when do you expect to see accretion on gross margins within your revenue mix to get back to your 35% long-term target? I guess just how should we think about the timing and cadence of that recovery? Again, given the uncertainty in the pricing dynamics in this market, we would say that the 30% is probably a little bit further out until we see an increase in market prices. We do have some lower-cost inventory pools we can pool against moving forward, but it also has to be complemented by higher market prices to be able to get back to that target gross margin range.
Speaker Change: Accretion on gross margins within your revenue mix to get back to your 35% long term target I guess, just how should we think about the timing and cadence of that recovery.
Speaker Change: Again, given the uncertainty in the pricing dynamics in this market.
Speaker Change: We would say that the 30% is probably a little bit further out until we see an increase in market prices.
Speaker Change: We do have some lower cost inventory pools being pool against moving forward, but it also has to be complemented by higher market prices to be able to get back to that target gross margin range.
Speaker Change: Sure.
Austin Moeller: Understood.
Speaker Change: Understood. Thanks for the column.
Austin Moeller: Thanks for the call.
Matthew Moss: Okay, the next question comes from Matthew Moss with B. Reilly. Please proceed. Hi, thanks for taking my questions.
Speaker Change: Okay. The next question comes from Matthew Boss with B Riley. Please proceed.
Speaker Change: Hi, Thanks for taking my questions, it's Matthew calling in for Josh Nichols.
Matthew Moss: It's Matthew calling in for Josh Nichols.
Brian Coleman: I just have a quick question. So you mentioned revenue from the DLA contract being down year over year. So I was wondering how much revenue came from the DLA contract this third quarter, and what your expectations are for the year compared to those that you laid out earlier this Yeah, so we had mentioned a few times now that there were certain, we called it surge buying under the DLA contract that occurred in 2023, that we didn't necessarily think could occur in 24. Not that they can't. It's just that relative to managing the contract, it was unusual relative to the historical perspective.
Matthew: I just have a quick question. So you mentioned revenue from the DLA contract being down year over year. So I was wondering how much revenue came from the DLA contract. This third quarter end.
Speaker Change: What your expectations are for the year compared to those that you'd laid out earlier this year.
Speaker Change: Yes, So we had mentioned.
Speaker Change: A few times now that there were certain we called it surge buying under DLA contract that occurred in 2023.
Speaker Change: We didn't necessarily think could occur in 2000 and for not that they can't.
Speaker Change: It's just that relative to managing the contract it was unusual relative to the historical perspective.
Brian Coleman: For the quarter, the DLA revenues were approximately $9 million, so they're running at that rate that we tried to guide to as a mid-30 or low-30 million annual revenue versus the 50-plus million in annual revenue that we achieved in 2023. Got it. Yeah. Okay, cool. That was helpful.
Speaker Change: For the quarter, the DLA revenues or approximately $9 million. So they're running at that rate that we tried to guide to.
Speaker Change: Mid 30, or low $30 million annual revenue versus the 50 plus million in annual revenue that we achieved in 2023.
Speaker Change: Got it yeah, Okay cool that was helpful. Thank you for taking my question.
Matthew Moss: Thank you for taking my question.
Operator: We have reached the end of the question and answer session.
Speaker Change: We have reached the end of the question and answer session I will now turn the call back to management for any closing remarks.
Brian Coleman: I will now turn the call back to management for any closing remarks. Well, thank you, operator.
Speaker Change: Well. Thank you operator, I'd like to thank our employees for their continued support and dedication to our business.
Brian Coleman: 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 fourth quarter results. Have a good night, everybody.
Speaker Change: 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 fourth quarter results 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. Thank you for your participation.