Refrigerants, Recycling & Energy Efficiency NASDAQ: HDSN May 2018 1
Safe Harbor Statement Statements contained herein which are not historical facts constitute forward-looking statements. These include statements regarding management s intentions, plans, beliefs, expectations or forecasts for the future including, without limitation, Hudson s expectations with respect to the benefits, costs and other anticipated financial impacts of the ARI transaction; future financial and operating results of the company; and the company s plans, objectives, expectations and intentions with respect to future operations and services. Such forward-looking statements involve a number of known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to, changes in the laws and regulations affecting the industry, changes in the demand and price for refrigerants (including unfavorable market conditions adversely affecting the demand for, and the price of, refrigerants), the Company's ability to source refrigerants, regulatory and economic factors, seasonality, competition, litigation, the nature of supplier or customer arrangements that become available to the Company in the future, adverse weather conditions, possible technological obsolescence of existing products and services, possible reduction in the carrying value of long-lived assets, estimates of the useful life of its assets, potential environmental liability, customer concentration, the ability to obtain financing, any delays or interruptions in bringing products and services to market, the timely availability of any requisite permits and authorizations from governmental entities and third parties as well as factors relating to doing business outside the United States, including changes in the laws, regulations, policies, and political, financial and economic conditions, including inflation, interest and currency exchange rates, of countries in which the Company may seek to conduct business, the Company s ability to successfully integrate ARI s operations and any assets it acquires from other third parties into its operations, and other risks detailed in the Company's 10-K for the year ended December 31, 2017 and other subsequent filings with the Securities and Exchange Commission. Examples of such risks and uncertainties specific to the ARI transaction include, but are not limited to, the possibility that the expected benefits will not be realized, or will not be realized within the expected time period. The words "believe", "expect", "anticipate", "may", "plan", "should" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. 2
Investment Considerations Growing Refrigerant Market Refrigerant is the critical chemical used in air conditioner and refrigeration systems Hudson sells all refrigerants Hudson has outpaced industry growth with 5-year revenue CAGR of 20% Significant Market Opportunity as Production of Certain Environmentally Harmful Refrigerants is Phased Out by Federal Mandate Hudson reclaims used refrigerant; positioned to fill the demand gap Company has ~35% share of growing reclamation market Recent Transformative Acquisition of ASPEN Refrigerants, formerly Airgas Refrigerant Business Doubles size of company Firmly establishes Hudson as a market leader in distribution and reclamation Current management including Hudson s founder beneficially own ~15%; aligned with shareholders to drive long-term value 3
What We Do Provide Virgin and Reclaimed Refrigerant For Use in Cooling Systems Refrigerant sales contribute 95%+ of revenues Hudson sells all refrigerants used for applications such as air conditioning Gross margin on virgin refrigerant sales ~20%; Distributor model Gross margin on reclaimed refrigerant ~50%; Producer model Recycle (Reclaim) Refrigerant Hudson is largest reclaimer in the U.S. with estimated 35% share of growing reclamation market Reclaimed refrigerant is a supply source Remediation and Energy Optimization Services Hudson provides emergency and performance optimization services Services help sell refrigerants <5% of revenues; growing market opportunity as entities focus more on energy efficiency and sustainability 4
Market Opportunity $1 Billion Non-Reclaim Refrigerant Aftermarket Hudson is a leading independent distributor selling all available refrigerants Consistently outpacing industry growth Near-Term $1 Billion R-22 Reclamation Opportunity by 2020 2020: Reclaimers become producers with 100% of R-22 supply being served by reclaimed R-22; EPA estimates demand at 50 million pounds annually Long-Term HFC Reclamation Opportunity Larger than R-22 Opportunity Phase downs expected to continue as industry seeks lower GWP refrigerants HFCS have been targeted for phase down through the Kigali Amendment to Montreal Protocol which goes into effect January 2019; U.S. needs legislation to adopt Long-Term Multi-Billion Dollar Energy Efficiency Opportunity Remediation solutions provide predictive, diagnostic services for reliability and emergency response Energy engineering uses real-time monitoring to identify and remediate inefficiencies to calibrate energy consumption to bring down energy costs and meet sustainability requirements 5
Coast-to-Coast National Coverage 1 Diverse customer base: 7,000+ customers 2 30+ facilities and stocking points 3 5 reclamation facilities San Juan 4 One of few companies with AHRI certified laboratories Corporate Office Reclamation Centers Stock Points Government Fulfillment Center 6
Acquisition of ASPEN Refrigerants Significantly Enhances Competitive Positioning Airgas- Refrigerants Currently ASPEN Refrigerants, Inc. ( ARI ) Airgas-Refrigerants was non-core to Air Liquide; offered a unique acquisition opportunity Acquisition closed October 2017 Transition and integration ongoing Provides Hudson: More scale (doubled size of business) and market share Enhanced strategic positioning for next generation refrigerant (HFC) Improved distribution channels 7
Acquisition Combines Complementary Market Strategies Combined sales strength Hudson brings strong legacy R-22 refrigerant business ARI contributes strong next generation HFC refrigerant business Optimal positioning at two key points in supply chain HVAC Supply House Residential Light Commercial Direct Industrial 24/7 Cooling (ie. Supermarkets, Chemical Plants) ARI Acquisition diversifies product mix and gives presence further down the supply chain 8
Hudson s Reclamation Business Positioned Well to Support Future Phase-Outs HFC Market Opportunity Is Significantly Larger Than CFC and HCFC Opportunities Yesterday: CFCs Example: R-12 Virgin Phase-Out Start: Virgin Phase-Out Complete*: 1995 1996 *Reclaim volume continues thereafter Today: HCFCs Example: R-22 Virgin Phase- Down Start: Virgin Phase- Down Complete*: 2010 2019 Example: Virgin Phase- Down Start: Virgin Phase- Down Complete*: Tomorrow: HFCs R-410A Est. 2019 Est. 2035 Example: Virgin Phase- Down Start: Virgin Phase- Down Complete*: Future: HFOs 1234YF (autos) When virgin production is eliminated, reclamation becomes the only source of production NA NA 9
Near-Term R-22 Market Opportunity EPA Final Rule (10/16/14) Production Phase Down Schedule: Virgin Supply 2014 2015 2016 2017 2018 2019 2020 43.5M pounds 22M pounds 18M pounds 13M pounds 9M pounds 4M pounds 0 pounds Virgin R-22 Production Will Be Zero By End of 2019 Despite elimination of virgin production, aftermarket demand expected to continue for approximately 20 years 2013 estimated stockpile of 119M pounds; HDSN expects majority will be used by end of 2018 EPA Projects Aftermarket Demand to be Approximately 50M Pounds by 2020 Reclaimed R-22 expected to fulfill a majority of that demand Reclaimed R-22 is best solution for R-22 systems R-22 Expected to Reach $30/lb; Creating $1B+ Potential Reclaim Market Opportunity 10
A Leader in the Fragmented Reclamation Market Hudson now captures approximately 35% of the reclaim market Other ~30 different companies National Refrigerants Ability to reclaim and recycle ALL types of refrigerants 11
Large DoD Contract: Expanded Products & Services Department of Defense Contract With Maximum Value of $400M Over 10 Years 5-Year contract with 5-year renewal option from the U.S. Defense Logistics Agency ( DLA ) Contract began July 2017 Fixed price contract for management and supply of refrigerants, compressed gases, cylinders and related items to U.S. Military Commands and Installations, Federal Civilian Agencies and Foreign Ministries Hudson is prime contractor Leverages existing infrastructure Prime Contractor Experience Expected to Lead to Additional Opportunities 12
Energy Services & Remediation Annual Energy Consumption for Air Conditioners ~$35B and Steam ~$200B Annuity-Based Revenues Boilers Air Compressors Chillers Energy Engineers Operations Customer Facility Hudson Solutions Hudson Software Monitoring Systems Refrigerant Sales Field Services Engineers System Data ChillSMART Energy Assessments Monitoring Recommendations Hudson s Emergency & Performance Optimization Solutions Drive Field Services and Refrigerant Sales 13
14 FINANCIAL OVERVIEW
First Quarter Overview 2018 selling season off to slow start Prolonged cold weather negatively impacting demand Limited demand until weather gets warmer and end users turn on their systems Customers utilizing just-in-time buying pattern rather than typical preseason inventory stocking 2017 pre-season prices increased and then declined later in season resulting in margin compression for those who stocked up early Price declines across most refrigerants R-22 pricing has declined to $11-12 range Should see significantly higher prices over the long term as phase out winds down HFC price reductions started in March and have continued 15
Consolidated Results (Unaudited) GAAP First Quarter 2018 Highlights Three Months Ended March 31, 2018 Three Months Ended March 31, 2017 Revenues $42.4 $38.8 Net Income $(3.1) $5.7 Diluted EPS $(0.07) $0.13 Non-GAAP Adjusted Net Income $(1.0) $6.1 Adjusted Diluted EPS $(0.02) $0.14 * See reconciliation of adjusted net income in appendix 16
Attractive Cash Flow Dynamics for Future De-Levering Free Cash Flow: 2018 Anticipate inventory balance to decrease $10M+ annually Full year non-cash expenses should provide approximately $8 million of additional cash flow Expect to generate $9 million from one-time cash tax benefit due to changes to tax law Free Cash Flow: 2019 Anticipate inventory balance to decrease $10M+ annually Full year non-cash expenses should provide approximately $8 million of additional cash flow Company expects to increase inventory turns as it sells acquired supply of gas and increases reliance on reclaimed refrigerants 17
Target Margin Profile Margins at current refrigerant prices 2018... Opportunity for margin improvement 2019 & Beyond Conservatively assuming R-22 pricing remains in low double-digits per pound Expect R-22 pricing to increase Revenue outlook: ~$230 million Double digit revenue CAGR GAAP Gross margin: Upper teens GAAP Gross margin: ~30% Free cash flow outlook: ~$30 million GAAP Operating margin: ~20% 18
Growth Opportunities Largest reclaimer with infrastructure and proprietary processes in place 1 Continue to drive refrigerant sales Outpace industry growth Leverage scale 2 Drive further penetration of reclamation opportunity Leading market share R-22 phase out underway HFC phase out imminent 3 Recent DoD contract provides financial upside Up to $400M Expands relationship with DoD 4 Expansion of energy services business Leverage across broader platform 5 Strategic acquisitions and market consolidation Organic and Market Growth Accelerate with Acquisitions 19
20 APPENDIX
Non-GAAP Reconciliation (Unaudited) Adjusted Net Income (Loss) and Net Income (Loss) Per Share Three Months Ended March 31, 2018 2017 Net income (loss) $ (3,056) $ 5,734 Income tax expense (benefit) (1,064) 3,574 Pretax income (loss) (4,120) 9,308 Amortization of inventory step-up in basis 1,080 - Amortization expense 742 122 Stock compensation expense 27 - Nonrecurring expenses 965 512 Adjusted pretax income (loss) (1,306) 9,942 Income tax expense (benefit) (336) 3,818 Adjusted net income (loss) $ (970) $ 6,124 Net income (loss) per share Diluted net income (loss) per common share (0.07) 0.13 Adjustment to diluted net income (loss) per common share 0.05 0.01 Adjusted diluted net income (loss) per common share $ (0.02) $ 0.14 21