Nat Krishnamurti: Well, as we said, without those two groups of sales, gross margins would have probably been closer to 38%. DLA right now, we’re seeing a tremendous amount of activity, much more so than we’ve ever seen before. This is now the second quarter that we reported their revenues are up and we’re likely headed towards a record annual revenue volume with the DLA, which we’ll report at your end. Carbon sales just kind of come and go. They’re not overly material, but because the offset market has been pretty strong in terms of pricing the margins on that transaction when you complete them, which could take some time, could be higher than what they might have been historically. So at some point, we’re not sure how our inventory costs will compare to pricing.
But if there was a stable pricing environment, then our costing should increase relative to the sale price, which then should take us on to something closer to overall blended 35% gross margin. If we see price increases like we saw with 2022, then we could do much better on the gross margin level. And then certainly, if we see the growth and reclamation as anticipated in the refrigerant management rule from the EPA, then our mix would change and then we would have higher or more volume refrigerants that we reclaimed versus distributing product we bought from a producer. And the margins on reclaimed typically are closer to 50%, which would help improve that overall blend.
Gerry Sweeney: Got it. Helpful. I’ll jump back in line. I appreciate it.
Brian Coleman: Thank you.
Operator: The next question comes from Ryan Sigdahl from Craig-Hallum Capital. Please proceed.
Ryan Sigdahl: Hey, Brian, Nat.
Brian Coleman: Good evening.
Ryan Sigdahl: Curious, the decline in refrigerant pricing, I think it was down a little bit sequentially as well. But can you talk through what you’re seeing in the industry and what you think drove that as we get closer to 2024, A little surprised when we saw it dripped a little lower at the tail end of the season here?
Brian Coleman: Yes, so we think as it relates starting back to Q3 of last year, like the very tail end, let’s say the month of September, we saw prices starting to come down and possibly that allowance holders overestimated what demand might be in the second half of the year relative to the first half of the year. And they may have found that they had extra allowances, so they started to lower the price. We think that philosophy for the allowance holders continued into the beginning of the 2023 year. And unfortunately, Q1’s weather was not as warm as Q1’s weather in 2022. So if you’re in a situation where you need to sell, you’re likely going to be forced to sell at a lower price. And we saw the lower pricing condition continue pretty much through most of the nine-month season going from somewhere above $10 a pound to probably a low of about $8 a pound in general for HFCs. Recently, we’ve seen a little rebounding in HFC pricing as we exit in Q3 starting into Q4.
We feel pretty good about where the pricing is at the moment. It’s headed back towards that $10 a pound, it looks like, price that we sort of started the year at. And so we just think next year is going to be a whole new year to start over, in some respects. Most of the customers that buy refrigerant are not going to buy until, let’s say, March of next year, April of next year, once they get out of the heating equipment and start to get into the cooling equipment. And likely the overall psychological impact of a 40% reduction will somehow be reflected in pricing starting in Q1 of 2024.
