Hudson Technologies Inc 2026 Q3 Earnings Call

Thank you. Good evening, and welcome to our conference call to discuss Hudson Technologies' financial results for the third quarter of 2026. On the call today are Ken Gaglione, President and Chief Executive Officer, and Brian Bertaux, CFO. I will 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 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 will turn the call over to Ken Gaglione.

Good evening, and thank you for joining us to review our third quarter results and the progress we are making to position Hudson for sustained long-term growth. Third quarter revenue and volume fell below expectations as ample channel inventory kept HFC market prices low. In this soft pricing environment, Hudson elected to concentrate on profitable sales and cost reductions to deliver gross margin that exceeded expectations. I am pleased with our strong 9% year-to-date sales volume increases and meaningful progress made on strategic initiatives designed to strengthen margins, expand capabilities, and create shareholder value. Of note this period, the EPA released data showing that U.S. HFC inventory declined 3% year over year in 2025, the latest data available. Although the channel inventory decline was less than expected, and we believe it is a meaningful contributing factor in the continued weakness in 410A pricing, the long-term trend remains clear.

From 2022, when the AIM Act took effect through 2025, reported total HFC inventories have declined approximately 27%, and reclamation is expected to become an increasingly important domestic source of refrigerant supply. At current levels, channel inventories could continue to moderate pricing and demand for reclaimed refrigerant as the industry approaches the next phase down in 2029. However, we also see several factors that may create demand beyond earlier projections, including the continued use of HFC components in certain next-generation HFO blends, opportunities in new markets such as data centers, and the potential for future adjustments to tighten the HFC allowance framework to keep the AIM Act phase down objectives on track. Additionally, certain state policies are creating early demand for reclaimed product. For example, both California and New York have regulations taking effect in January 2027 that require the use of certified reclaimed refrigerant in certain automotive applications.

We will continue to take advantage of these and other opportunities as early adopters prepare for the 2029 phase down. As noted separately, we signed a joint development agreement during the quarter with Icorium, a Kansas-based company specializing in next-generation technology for mixed refrigerant separation. The agreement gives Hudson dedicated access to advanced engineering resources and technology, first-mover advantages during the initial commercialization period, and creates a path to expand our separation capabilities and capacity. This patented extractive distillation technology is expected to complement our existing fractional distillation systems by processing complex refrigerant mixtures, including those difficult next-generation blends and azeotropes with greater speed, recovery, and efficiency. If successfully commercialized, this technology will help convert more recovered refrigerant into saleable product, reduce destruction and inventory days on hand, improve working capital efficiency, and lower our reliance on virgin refrigerant.

Because the technology enables the separation of mixed refrigerants, it may also make refrigerant recovery more convenient and economical for contractors who will be able to combine the refrigerants they recover into one cylinder rather than sorting by product type into several cylinders. This small adjustment can have a big impact and help reduce the friction at the point of recovery and support higher industry recovery rates. We believe the broader industry can benefit from this partnership while also strengthening Hudson's cost position and enabling us to establish a differentiated technology-enabled platform for refrigerant recovery, purification, and separation services. Also noteworthy, in August 2026, Hudson was re-awarded the $210 million DLA contract. The award extends this important strategic relationship for five years through July 2031, with the opportunity for an additional five-year extension through July 2036. During the third quarter, the DLA contract contributed $11 million in revenue.

We are continuing to optimize our D365 ERP platform implementation and strengthen the operating discipline, data visibility, inventory controls, and decision-making capabilities it supports. Together with broader process and facility improvements, these efforts are designed to simplify workflows, increase productivity, reduce costs, and create a more scalable operating platform for the future. Our commercial focus will remain on increasing the value of every pound we sell through a stronger product mix, disciplined pricing, and growth in higher value reclaimed and specialty refrigerants to support core customer requirements. This approach allowed us to strengthen our cash position in the quarter, providing us the financial flexibility to continue investing in our strategic priorities. As we move forward through the fourth quarter and prepare for 2027, we will continue strengthening our core capabilities to support the growth strategy.

Our priorities include advancing the new separation technology and making disciplined investments in our facilities, operating efficiency, talent acquisition, and market development. Taken together, we are managing market forces beyond our control while building a more resilient, higher value business designed to reduce our future exposure to short-term refrigerant price fluctuations. Now I will turn the call over to Brian. Brian, please go ahead. Thank you, Ken, and good evening.

I will walk through our third quarter 2026 results compared with the same period in 2025. Hudson generated $59.4 million in revenue, a 20% decrease from the 2025 quarter. Sales volume declined 9% and average price of sales 17%. During the prior year quarter, refrigerant prices rose broadly as supply chain constraints accompanied the EPA-mandated shift to next generation cooling equipment that uses lower GWP refrigerants. Gross margin was 25%, better than expected, though below the 32% reported in the 2025 quarter, given the 2025 AIM Act related price fluctuations. SG&A expenses increased by $1.9 million to $10.8 million in the 2026 quarter. The increase was driven by two factors. First, we continued to incur costs for the new ERP system, although third quarter ERP expense was 50% lower than in the second quarter. Second, we expanded our team and engaged consultants to support long-term growth.

Net interest was essentially flat in the 2026 quarter versus $800,000 of net interest income last year due to a lower cash balance on our debt-free balance sheet. Other income also differed significantly from the prior year quarter. In 2025, the company recognized $1.6 million of other income from a potential earn-out related to the 2024 acquisition of USA Refrigerants that ultimately did not materialize. Hudson reported net income of $2 million, or $0.05 per diluted share, compared with $12.4 million or $0.27 per diluted share in the 2025 quarter. The decline in net income reflects continued softness in HFC refrigerant pricing, ERP optimization costs, and investments in personnel and initiatives designed to create shareholder value. The company ended the quarter debt-free with $35.3 million in cash, a $10 million increase from June 30, 2026.

Our capital allocation priorities remain organic and strategic growth, complemented by opportunistic share repurchases. We did not repurchase shares during the 2026 third quarter because investing in the business remains our near-term priority. Year to date, we have repurchased $2.5 million of shares. We are reaffirming our 2026 gross margin target at the low to mid 20% range. With that, I will turn the call back to Ken.

Thank you, Brian. While near-term HFC market pricing remains challenging, we are encouraged by the 9% sales volume growth achieved through the first 9 months of 2026, reflecting the strength of our customer relationships and leadership role in the refrigerant marketplace. As the industry transitions to new lower GWP refrigerants, we believe Hudson's expertise, facilities, and national distribution network position us to continue to support customers across the refrigerant life cycle and capture expanding market opportunities. The investments we are making today in technology, operating efficiency, and organizational capability are designed to create a more agile, scalable, and differentiated company in the future. With a debt-free balance sheet and a clear strategy, we believe Hudson is well-positioned to strengthen profitability, generate sustainable cash flows, and deliver attractive long-term value for our shareholders. Operator, we will now open the call to questions.