Brian Coleman: Yes. We won’t comment about exact timing. But your assumption that, let’s say, folks could consider they have a pot of gold because, let’s say, pricing in 2022 was 40% higher than where we are today, certainly, they’ve come back to Earth. So I do think your assumption that the negotiation is, let’s say, slightly more favorable today than if we had executed something, say, two years ago or so. So the opportunities are there. The areas that we’ve always talked about are reclaimers. But as it relates to reclaimers, generally speaking, they would be few in number and lower dollars. There maybe opportunities in distribution. They would tend to, again, be few in number, but higher dollars. And then I think the wide-open space for acquisitions is in the contractor space.
Joshua Nichols: Thanks for clarifying on that. And then just for context, I know we’re kind of only a month into the – what is typically the company’s strongest quarter here in 2Q, but some of the headwinds get a little bit better. I know pricing maybe a little bit softer. But if you just kind of think about it contextually where pricing is, in the first quarter, right, revenue was down around 15% year-over-year, including that DLA contract headwind and pricing being down around 20%. Fair to assume that when we’re looking at 2Q on an apples-to-apples basis, at least based on how things are today, that you’d see pricing down. But maybe it’s down more like 10% to 15% instead of 15% plus just because the comps are a little bit better in 2Q of 2023 versus 1Q.
Brian Coleman: You’re exactly right. Going back to 2023, we started the year much higher than we started this year. But probably in about June of 2023, we were seeing those $8 a pound prices that continue probably until about September-ish. And then we started to see a slight uptick getting closer to $10. But that $10 really didn’t kick in until September-ish. Almost no material impact to Q3. It had more of an impact on Q4.
Joshua Nichols: That’s it for me. Thanks guys. I’ll hop back in the queue.
Brian Coleman: Well, thank you, too. Appreciate it.
Operator: [Operator Instructions] The next question comes from Austin Moeller with Canaccord. Please proceed.
Austin Moeller: Hi. Good afternoon, Brian and Nat. My first question here, what is the latest that you’re hearing from the DLA on the potential for more advanced procurement in the second half? I mean it sounds like they’re currently purchasing at the rates that you expected in the first quarter so far and you expect that run rate. But I guess there’s opportunity there for improvement in the second half. But I guess, what have they communicated to you?
Brian Coleman: Unfortunately, there isn’t a lot of visibility and/or communication because the contract is constructed as an indefinite quantity. So that’s why we had to make an estimate on our side of what we thought might be more surge-related or less potential recurring in the 2024 year. But to your point, and as we tried to say before, it doesn’t mean we won’t see some of that come back in the 2024 year. But we were trying to, let’s say, level-set expectations that, let’s say, a $32 million, $33 million run rate on an annual basis, while higher than it used to be at around $25 million, less likely that we would see it in $40 million to $50 million as we did in 2023.
Austin Moeller: Okay. That’s helpful. And then just a follow-up. Do you expect that the tightening of HFC supply this year, combined with the requirements under the refrigerant management rule for reclaimed in certain industrial units and other new units, to be what’s really needed to permanently drive prices higher, just given where that inventory stockpile is at?
Brian Coleman: Well, we always look at the stockpile that it’s a one-time event. Once the stockpile is sold, it’s gone. And back to the current year, we do believe that the 40% overall reduction or 30% further from where we were last year does create a drawdown on that stockpile. Does it use up all that stockpile or not in the 2024 year, that’s the difficult thing to predict. So you have that particular element. But then as it relates to the refrigerant management rule, and again, depending on how the final rule comes out, once we start to get into a situation where there’s a mandate for the use of reclaimed, then we believe there is a potential departure of pricing or refrigerants, irrespective of reclaimed or virgin. And that possibly reclaimed, because it will have a demand, maybe in a position to be priced slightly higher.
Certainly, from an environmental footprint point of view, reclaimed is more valuable than virgin if you want to measure an ESG component to this. Because under the American Carbon Registry, reclaimed refrigerants have about one-tenth the carbon footprint. So if you want to calculate that delta and put a value on carbon, you could certainly put a value, and reclaimed refrigerants should be priced higher as well. So part of the calculus to redetermine when we expect to be able to achieve, for example, a $400 million revenue target goes back to, in some respects, how the EPA implements that refrigerant management rule. Now one of the things that we suggested doesn’t mean that the EPA will do it, but they did offer a comment, is to initiate the reclaim mandates earlier, but start at a lower percentage.
So the way the proposed rule was constructed, the EPA started with 100% reclaimed demand use in 2028. We suggest it start in 2025 and work your way up to that 100%, as an example. So when we see the final rule, we’ll then be able to evaluate how we think the reclaim side of our business model, which is the most profitable side. Generally, our gross margin or our profit profile on the sale of a pound of reclaimed is twice as great as compared to virgin. How that will help impact our profitability and revenue growth.
Austin Moeller: Great. Thanks for the color.
Operator: Okay. Up next, we have Gerry Sweeney with ROTH Capital. Please proceed.
Gerry Sweeney: Good afternoon, Brian and Nat. Thanks for taking my call.
Brian Coleman: Hello. Good afternoon.
Gerry Sweeney: Just a follow-up question on acquisitions. Most of my other questions have been answered. But obviously, you discussed reclaimers, distributors and contractors. If you had your choice, where would you think the best option would be strategically for Hudson? From my perspective, I would think you would want to be looking at the contractor space. And I know there’s different dynamics around what comes first. But I’m just curious as to where you think would be best for the strategic positioning of Hudson.
