HDSN - NASDAQ

Greetings. Welcome to the Hudson Technologies Fourth Quarter and Year-End 2025 Earnings Call. [Operator Instructions]. Please note, this conference is being recorded. I will now turn the conference over to your host, Jen Belodeau of IMS Investor Relations. You may begin.

Thank you. Good evening, and welcome to our conference call to discuss Hudson Technologies financial results for fourth quarter and year-end 2025. On the call today are Ken Gaglione, Hudson's President and Chief Executive Officer; Brian Bertaux, CFO; and Kate Houghton, Hudson's Senior Vice President of Sales and Marketing. 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. 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 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. During the call, we will also be referring to certain non-GAAP financial measures. For a detailed reconciliation of these measures to GAAP financial measures, we refer you to the press release issued earlier this afternoon and the 8-K filed this afternoon with the SEC. With that, we will now turn the call over to Ken Gaglione. Please go ahead, Ken.

Good evening, everyone, and thank you for joining us. Since we're turning to Hudson as CEO in November, I've already had a chance to speak with many of you, and I'm pleased to have this opportunity tonight to address a broader audience of investors and analysts. It's been a very busy and productive 3 months with our internal operating teams as well as with key customers. There are many positive changes and a lot of progress in a few years since I left Hudson and I found the underlying foundation of the company and my return remains very solid. Hudson is comprised of a tremendous group of knowledgeable and service-oriented professionals with a commitment to delivering innovation and sustainable refrigerant products services and technology that our customers need in this continuously evolving and frequently complex HVAC landscape. I'm excited to be back and to have this opportunity to lead Hudson as we write our next chapter. Before we get into the financial results, I want to take this opportunity to discuss my vision for Hudson and our strategy and priorities going forward. As you know, Hudson has been an industry leader in refrigerant distribution and an innovator in reclamation and refrigerant management service for decades, our founder pioneered refrigerant reclamation in the U.S., and we successfully navigated 2 previous refrigerant phaseouts. CFCs in the late '90s and HCFCs in the mid-2000s and now we're currently moving through another phasedown of HFCs to HFOs. Our core business of refrigerant reclamation sales and associated services remains the focus of our organic growth strategy. This is critical to our commitment to the refrigerant life cycle management and sustainability, whereby we help to ensure optimum system performance using environmentally beneficial reclaimed refrigerants. There are many opportunities for our continued growth in support of this core mission. In the near term and in alignment with our capital allocation strategy, we're focused on investing in a few concentrated areas that I'd like to speak about tonight, infrastructure, inventory and ERP. First, investing in our infrastructure includes expanding our separation technology and automation to ensure we are well prepared and positioned to meet the evolving needs of our customers and the new more complex HFO refrigerant blends. Additionally, we are investing in inventory that is crucial to our operations and supports our well-earned reputation for efficiently supplying our customers with the refrigerants they need when they need them. Looking back, we were somewhat light on inventory at the end of 2024. And as a result, misdelivering on some orders during the 2025 selling season, a situation that was corrected in the fourth quarter. We remain committed to investing in our inventory so that we are well positioned to deliver the service excellence that our customers have come to rely on. More recently, we went live with the new ERP system in February 2026. This will add connectivity to our operations and provide a more efficient platform for our ability to reliably serve our customers. Like many new ERP implementations, we have had our share of start-up headaches, which Brian will cover in more detail. Second, we're focused on the organic and strategic expansion of our service capabilities in the commercial market. In the short time that I've been back and working with our internal teams, we have identified several opportunities to apply our existing technology and expertise to provide additional service offerings to our customer base, the HVAC market has a multitude of servicing needs, and we believe we have an opportunity to capture more of that demand. Some examples include the separation of packaging of new refrigerant blends that require specialized balancing and handling, providing new methods to recover refrigerant from underserved segments of the market, and HVAC system optimization services, just to name a few. Third, we'll continue our disciplined approach to accretive acquisitions. In conjunction with driving organic growth, we will continue to evaluate our acquisition and alliance opportunities that complement our core capabilities and/or strengthen our geographical presence in the market. As example, our recent acquisition of Refrigerants Inc. is an example of that approach and has given us an enhanced presence in the western portion of the U.S. for both securing recovery refrigerant and refrigerant distribution. And lastly, fourth, returning capital to our shareholders via our opportunistic stock repurchase program. We repurchased $20 million in stock during 2025 and intend to continue our practice of opportunistic buybacks in 2026. Let me take this opportunity to acknowledge that these initiatives build upon the strong foundation passed to me from my predecessor. And for that, I and the company are truly grateful. And I don't believe this is a time for a transformative change. It's not necessary for our company right now. But instead, it's a time for diversification of our revenue stream to reduce seasonality and our dependence on a few dominant refrigerants. Our entire team here is committed to capitalizing on the opportunities in front of us this year. Now I'll touch briefly on fourth quarter and full year results before turning the call over to my colleagues. As many of you know, Q4 is historically our weakest quarter from a sales volume perspective as it falls outside of our 9-month selling season. Nonetheless, we delivered impressive revenue growth of 28% in the fourth quarter 2025, primarily related to strong sales volume, which we believe is a promising indicator of the demand environment going into 2026 and a validation of our focus on driving volume by exceeding customer expectations. Additionally, during the fourth quarter, we completed our accretive acquisition of Refrigerants Inc. Headquartered in Denver, which strengthens our presence and access to the recovered refrigerant supply chain in the Western United States. I'll give you a brief overview of our full 2025 financial performance. We grew 4% for the full year to $246.6 million in annual sales volume with a growth of 6%. Our gross margin was 25%, and we posted non-GAAP adjusted net income of $19.7 million or $0.44 per diluted share. Also important here is that 2025 also marks our second consecutive year in achieving an 18% increase in reclamation volume. This is directly related to our activities at the contractor level. As we frequently mentioned in these calls and elsewhere, refrigerant recovery is critical to the reclamation process and Hudson has been an industry leader in building awareness among contractors around the importance of recovery both from a sustainability standpoint and an economic perspective. We have substantially heightened our ability to secure recovered refrigerant via our acquisitions of USA Refrigerants and Refrigerants Inc. which expanded our recovery team and our geographic reach. Expanding reclamation as a critical part of our supply chain, and it will be increasingly important with the EPA's further reduction in consumption allowances in 2029. I'll take a moment now and turn to our work for the Defense Logistics Agency or the DLA. Last year, we recorded revenue of $38 million for the full year under our DLA contract. As many of you know, during the fourth quarter, we announced that we had been awarded the renewal of our DLA contract to support the U.S. military as a prime contractor. In late January '26, this last January, we were notified that a competitor had filed a bid protest regarding an administrative challenge to the DLA's evaluation of proposals and the contract award to Hudson Technologies. Our contract award has been rescinded while the DLA conducts its review of its internal processes. And while this development is disappointing, Hudson has a proven and successful 10-year working relationship with the DLA and we'll continue providing logistics support on our existing contract with runs through 2026. We are determined to preserve our position as a value partner to the DLA while this protest is being resolved, and we will provide further updates as we learn more. In closing, I would say, overall, I am very pleased -- we are very pleased with our solid fourth quarter close to 2025, and we are energized for the opportunities we see to grow our business. Now I'll turn the call over to Kate Houghton, our Senior Vice President of Sales and Marketing, to provide some additional detail around Hudson's market opportunity.

Thank you, Ken, and good evening, everyone. We executed well in the fourth quarter and delivered increased sales volume and what is historically our seasonally slowest quarter when a large portion of our customers transition from cooling applications to heating. In fact, our execution in the back half of 2025 offset what had been a late start to our 9-month cooling season. It's still relatively early in the year, but as we begin the 2026 cooling season, we currently see supply and demand is balanced in the market with some slight refrigerant price appreciation. At the close of 2025, the average price of HFCs was slightly below $6 per pound and as we report to you today, it's slightly above $6 per pound. As Ken mentioned, for the second consecutive year, we achieved an 18% increase in reclamation volume. We believe our solid growth reflects our successful grassroots effort to promote recovery and reclamation activities to the field technicians who facilitate the recovery and return process as well as the expanded recovery capabilities resulting from our acquisitions of USA refrigerants and Refrigerants, Inc. During the fourth quarter, we continued to actively engage with our refrigeration technician and contractor partners to highlight the environmental and economic benefits of recovering and returning refrigerants rather than venting refrigerant, and we will continue these efforts as we move through 2026 and beyond. In addition to our industry outreach during 2025, we also launched 2 innovative reclaim pilot programs to promote recovery and reclamation process and technology. In September, we began our partnership with DC Sustainable Energy Utility, or DCSEU to establish the nation's first refrigerant recovery and reclamation pilot in Washington, D.C. The program is linked to DCSEUs greenhouse gas emission goals. And through this pilot, Hudson provides HVAC contractors with training on recovery best practices, supplies proper storage containers for use refrigerants, covers shipping and logistics and offers financial incentives for recovered refrigerant. The pilot is off to a strong start with early positive results. Participating contractors have avoided 600,000 pounds of equivalent CO2 emissions by reclaiming with Hudson, and the program is set to expand to a wider range of participating contractors this year. We are encouraged that CSU program is also thinking about refrigerant recovery as greenhouse gas CO2e reduction rather than the typical view of reduced energy consumption. This approach is key to encouraging utilities around the country to accelerate the support of refrigerant reclamation in decarbonization efforts. In December of 2025, we announced that Hudson was selected to support the California Air Resources Board, or CARB, with their REFRESH pilot program, the state's first program to incentivize refrigerant recovery and reclamation. In this pilot, Hudson will partner with contractors who are part of the California Energy Commission's Equitable Building decarbonization direct in-store program to provide training on safe and efficient recovery practices and as a purchaser of recovered HFCs and HCFCs for reclamation. We're very excited to be part of these innovative new programs and optimistic that we'll continue to see additional opportunities as more state and local governments adopt legislation mandating the use of reclaimed refrigerants. Finally, I'd like to take a minute to address the recent development at the EPA revoking the endangerment finding established in the Obama administration. The endangerment finding has served as a basis for regulating certain pollutants, including HFCs under the Clean Air Act. The recession of this endangerment finding primarily limits EPA's ability to develop further HFC regulations under the Clean Air Act, and we don't believe it will affect the AIM Act's independent statutory authority for the HFC phasedown. OEMs and refrigerant producers are already well on their way in developing next-generation lower GWP alternatives to HFC refrigerants and equipment and Hudson remains in a strong position to reclaim and provides HFCs to meet the anticipated continued demand into these 100 million plus units reach the end of their useful lives. As we begin to move through 2026, I want to echo Ken's comments about our optimism for what lies ahead for Hudson. We have a strong foundation to build from, which includes our long-standing customer base, leadership position in supply of both surgeon and reclaim refrigerants of all types, innovative thinking to engage nontraditional industry partners in the growth of refrigerant recovery, sophisticated field service capabilities and the ability to leverage our proprietary technology and expertise to drive growth. With our renewed focus on expanding our core business through complementary opportunities and focuses on strategic expansion in complementary areas, we believe we are well positioned to grow our leadership role in the marketplace. Now I'll turn the call over to Brian Bertaux to review our fourth quarter and full year 2025 results. Go ahead, Brian.

Thank you, Kate. First, I'll review our Q4 '25 financial results with a comparison to Q4 '24. We recorded $44.4 million in revenue, an increase of 28%, primarily driven by increased sales volume. As Kate noted, our strong sales volume execution in the back half of 2025 more than offset what had been a late start to our 9-month selling season. We posted gross profit of $3.5 million compared to $5.8 million of Q4 '24. The Q4 '25 gross profit reflected the impact of $4.2 million of inventory-related costs including a lower of cost or market adjustment resulting from the fourth quarter inventory build. Hudson recorded SG&A expenses of $13.9 million compared to $8 million in Q4 '24. SG&A in the '25 quarter included $4 million of executive severance costs. Excluding the $4 million severance costs, non-GAAP adjusted SG&A was $9.9 million compared to $8 million in Q4 '24, with the variance related to increased staffing. Operating loss was $11.2 million compared to an operating loss of $3.2 million in Q4 '24. The Q4 '25 operating loss includes $8.2 million in inventory and the $4 million severance costs. Non-GAAP adjusted operating loss, which excludes the $4 million of severance-related costs was $7.2 million compared to Q4 '24 operating loss of $3.2 million. We recorded a net loss of $8.6 million or $0.20 per diluted share which includes the after-tax impact of the $8.2 million of previously described costs compared to a net loss of $2.6 million or $0.06 per diluted share in Q4 '24. Non-GAAP adjusted net loss was $5.4 million or $0.13 per diluted share, which excludes the after-tax impact of the $4 million executive severance cost compared to a non-GAAP net loss of $2.6 million or $0.06 per share for Q4 '24. Turning to the full year. Hudson posted $246.6 million in revenue a 4% increase from 2024, and that increase was primarily related to a 6% increase in sales volume, which was partially offset by slightly lower pricing. Revenue from our DLA contract was $38 million in 2025. 2025 gross margin was 25.2% compared to 27.7% in 2024. This reflects slightly lower refrigerant market prices and higher freight costs. 2025 SG&A was $40.2 million compared to $33 million in 2024. Non-GAAP adjusted SG&A was $36.2 million compared to $32.6 million in 2024. Excluding the $4 million of severance costs, the increase in SG&A includes the midyear 2024 increase to our sales staff. The company recorded operating income of $18.6 million compared to $29.3 million in 2024. Non-GAAP adjusted operating income was $22.6 million compared to $29.7 million in 2024. The decrease from 2024 reflects the aforementioned lower gross profit and increased SG&A costs, primarily from increased staffing. Hudson recorded net income of $16.7 million or $0.37 per diluted share compared to net income of $24.4 million or $0.52 per diluted share in 2024. Non-GAAP adjusted net income and diluted earnings per share were $19.7 million and $0.44, respectively, compared to non-GAAP EPS and diluted shares of $24.7 million and $0.52, respectively, for 2024. The company's unlevered balance sheet remains strong at year-end with $39.5 million of cash. During the quarter, we demonstrated our commitment to our capital allocation strategy of organic and strategic growth and opportunistic share repurchases. In Q4 '25, we invested in restocking inventory acquired Refrigerants Inc., and repurchased $14 million of company stock. The investment in inventory at year-end ensures that we are well positioned for the 2026 selling season. Consistent with our capital allocation strategy, we repurchased $20 million of common stock in 2025, and we expect to continue to pursue opportunistic buybacks in 2026 with our $20 million authorization. As Ken noted, we recently went live with a new ERP system that we expect will add an activity to our operations and provide a better platform for reliably serving our customers. Like many new ERP implementations, we have experienced some start-up inefficiencies in Q1 2026. Despite that headwind, we expect Q1 2026 revenue to increase by a low to mid-single-digit percentage as compared to Q1 2025, and we don't expect the ERP-related inefficiencies to persist in the second quarter and forward. Now I'll turn the call back to Ken for his closing remarks.

Thank you, Brian. So 2025 was a year of notable changes and foundational progress for Hudson. We enter 2026 energized by the opportunities we see to grow our leadership role as a provider of sustainable refrigerant and reclamation products, technologies and services through strong execution as well as through our strategy to expand our core capabilities by leveraging new opportunities in adjacent markets. Operator, we'll now open it up for questions.

[Operator Instructions] First question comes from Gerry Sweeney with ROTH Capital.

I just wanted to talk about -- I mean, you highlighted some of your, I think, key focuses going forward in organic and accretive and specifically, I wanted to get an idea of what we were thinking in terms of maybe opportunities around service, HVAC optimization and removing some of the lack of, a better word, focus on just refrigerants and reclamation and moving some seasonality.

Absolutely, Gerry. Thanks for the question. So I'll add a little color to that. And when people think about services in the HVAC industry, they tend to immediately think about contracting services, people that show up in the driveway, the technicians. But that's not really what we're speaking about directly. When we talk about our services expansion, we are looking at other types of services that -- and there are a lot of them that are hidden behind, let's say, chiller operations that people are less familiar with, including proactive services where we monitor and measure chiller performance. We look at other aspects of the chiller in terms of its operating performance, which we've been doing with our services group for some time. And there's adjacencies to where there are services that we can provide with new infrastructure capabilities for A2L refrigerants, HFO refrigerants, complicated HFO refrigerant blends that we feel we have a unique advantage in the marketplace to take -- to help balance those refrigerants, package them and redeploy them.

Got you. And when you're talking chillers, you're referencing like commercial sized opportunities.

Correct. Yes.

How do you go about sort of opening up this opportunity? Obviously, you do have -- Hudson has had a service component that's been around for years. And I think it's received lots of attention maybe from the investment community, but maybe not from the internal aspect, but curious as to how you built this out.

Yes. Great question, Jerry. So thinking about it, as Ken touched upon, thinking about taking our services in a more proactive manner versus an emergency response. So Hudson is very well known in the industry for an emergency response to large chiller built systems. Taking our expertise into that stage before you have to have an emergency response, how do you better manage that chiller, how do you proactively think about it as an asset, and all the things that go into that with the refrigerant circuit is one of those areas that we're focusing on and spending more time on lightly.

Got you. And one more question. This may be very early in the process, but maybe do you have any like aspirational targets as to where revenue could be in terms of maybe opportunities outside just direct refrigerants distribution. So maybe a balancing perspective.

Yes. That's a little hard to say, but we do have some targets we're developing, Jerry, in terms of percentages of sales. And as I said earlier, the key for us is to reduce our dependency on certain refrigerants as we go forward into our strat plan. So I think we'll be able to give you some guidance on that, a little better guidance on that in the coming months. But right now, it's a little bit early to say.

Next question is from Ryan Sigdahl with Craig Hallum.

This is Matthew Raab on for Ryan. I just want to start on HFC pricing, like it seems like things are mostly stable. I think you mentioned slightly above $6 a pound. I guess just any update on the trends you're seeing whether it be inventory, what's going on in the channel? What you're hearing from tax in the field? And then I don't know if I caught it, was there any change in expectation on pricing for 2026 as a whole?

Yes. That's again, great question, Matthew. And thank you for that. So as we said, when it came into the beginning of the year, pricing and typically, we're talking use 410A as a bellwether because it's the dominant HFC refrigerant, it's a little bit below $6 a pound. It's a little -- as we're talking to you today. It's a little bit above $6 a pound. We see right now that the market is balanced in terms of supply and demand. So not thinking about and not seeing indications right now of some of the shortages and disruptions that happened in the market last year. We're seeing the signs of small price appreciation. It's still a little early in the year, some places in the country, including with Cliff Lake, New Jersey, have 2 feet of snow on the ground. And it's not a lot of people thinking about turning on their ACs yet. But we are starting to see a little bit of upward price appreciation, and we think we'll see that continue.

Understood. Maybe moving over to I guess, broadly, do you have any expectation for the mix in '26? We've heard from some of the OEMs that the aftermarket demand for HFO is going to kick in more so in the second half of '26. Do you have any thoughts on what that mix could be for Hudson? And then any commentary maybe on HFO pricing versus HFC pricing would be helpful.

Let me take a stab at it, Ryan. I mean the HFO demand for a company like cuts in is all service demand, right? It's all aftermarket demand. And the build-out for HFOs is ongoing for first fill and OEM, as you mentioned. So I'm not expecting -- we're not expecting to see any real significant increase in HFO demand from our side for, let's say, the first part of 2027. So we still -- we see it today. We see it. We get it. We understand it. We know how to rebalance it. But in terms of actual real continuous service demand, I wouldn't think it would be second half of this year. I think more likely you're looking at early next year.

The next question is from Austin Moeller with Canaccord.

So just my first question here. How much cylinder inventory do you expect to need to meet demand in 2026? And how close are you to that target given the build?

We really don't speak to the cylinders. However, we have the inventory both in refrigerants and cylinders, again, not to short the market, we leaned in heavy. So we feel ready and equipped to meet all demand for 2026.

Okay. And what do you view as the most important factor this year to improving the gross margin relative to last year? Is it just appreciation in pricing? Or are there other factors we should be focused on?

Well, in addition, I mean pricing is one variable, but we work day in and day out. We use fixed asset investments to automate things and to reduce costs. We have a new ERP system that we spoke to that should provide us efficiencies, better information, better information to make informed decisions. So with information, with investments in fixed assets and just focus on continuous improvement, we find ways to reduce costs.

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

This is Matthew Maus on for Josh Nichols. I guess to start off on the inventory build. You mentioned feeling light on inventory at the end of 2024, not having enough firepower in 2025. So I'm wondering at what price levels were you accumulating in 4Q? And how does the full dynamic set up for margins as you sell in the sell through the peak season?

Yes. So just number one, if you historically looked over, say, the last 7 years, we typically have maybe a little bit more than 6 months of inventory on hand at any given year. And we entered 2024 significantly below that. So we did miss themselves, and it didn't move the needle. We just -- we -- as far as our reliability and service our customers, we don't want to miss one cell. So for 2025, we just went back up to more historical standards and around a 6-month inventory days on hand.

Got it. So then with pricing at around like $6 a pound and inventory stock. I'm assuming at similar levels, how should we think about gross margins for 2026 directionally?

Gross margins for 2026. And as we noted in our last call, if there's no real change in pricing, then really our gross margin for '26 should be comparable to '25.

Got it. And just last one on the DLA. Is there any update on the bid process time line? And should we assume a similar $38 million run rate for 2026 under the existing contract?

I think that's a fair assumption. We think it's going -- we're good through the end of this contract that we have currently. We see it continuing through the end of the year. So that's our projection as well. And I think the updates, there's been some recent activity that's positive for us, but it's hard to know right now what the timing looks like. So I'd rather not comment about it. It's a convoluted process they go through. But I think in the end, we're very optimistic that we're going to prevail.

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

All right. Thank you, operator. So I appreciate everyone's interest in Hudson Technologies. I think you understand that we have a lot of opportunity here for growth. And on behalf of Kate, Brian and myself, I want to thank our employees, particularly our employees for their commitment to our success. And we also want to thank you for your interest and support of Hudson's Technologies mission and our commitment to the sustainable practices around refrigerant life cycle management. At Hudson, that's not just a slogan, it's not just words, it's actually something that we really believe in, and we believe in effective refrigerant life cycle management. We look forward to speaking with you in May to discuss our first quarter 2026 results.