Hudson Technologies Inc (HDSN) 2011 Q3 法說會逐字稿

Greetings and welcome to the third-quarter 2011 earnings conference call. At this time, all participants are in a listen only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, John Nesbett of IMS. Thank you, Mr. Nesbett. You may begin.

Good morning and welcome to our conference call to discuss Hudson Technologies financial results for the third quarter of 2011.

On the call today, we have Kevin Zugibe, Hudson's Chairman and Chief Executive Officer and Brian Coleman, Hudson's President and Chief Offering Officer. Kevin will review the company's business operations and future growth strategies and Brian will review the financials, and immediately thereafter, we will take questions from our call participants.

I will now take a moment to read the Safe Harbor statement.

Statements contained herein which are not historical facts constitute forward-looking statements involving 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 market for refrigerant, including unfavorable market conditions adversely affecting the demand for and the pricing of refrigerants; the company's ability to source refrigerant; regulatory and economic factors; seasonality, competition, litigation, the nature of supplier and customer engagements which 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 lives of the assets; potential environmental liabilities; customer concentration; the ability to obtain financing; and other risks detailed in the Company's periodic reports filed with the Securities and Exchange Commission.

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.

Okay. With that concluded, I will now turn the call over to Kevin. Go ahead, Kevin.

Good morning and thank you, everyone, for joining us today. Have you seen in this morning's release we achieved strong revenue growth of 49% for the third quarter and 22% in the first nine months of 2011. The growth was achieved from increased volume of products and services as we continue to see strong demand for all the refrigerants we provide. Our revenues for the past nine months surpassed our record 2010 full-year results. Excluding the anomaly of 2009, our year-to-date 2011 revenues represents the third time in the past four years that we have achieved record revenues; the seventh year out of the past eight years that we have attained double-digit revenue growth; and an overall compounded revenue growth rate of approximately 14%.

We have achieved this track record of growth by focusing on the expansion of our customer base and product offering elements of our business that we can control. By successfully leveraging our business service offerings, we are able to mitigate the commodity aspect of our product sales and help enhance our relationship with our customers. That focus has resulted in record revenues despite an industry-wide 20% decline in the price of our R-22 and a 20% decline in the volume of reclaim when compared to 2008.

The revenue growth is also exclusively organic. As we will discuss, we are beginning to branch outside of the United States and are looking at opportunities that expand our offerings and generate new and additional revenues. In addition, we are presently analyzing a potential expansion into additional markets which has synergies with the refrigerant market.

That said, we are not pleased to report lower gross margins this quarter. While our refrigerant sales volume increased significantly, our pricing expectations for R-22 did not materialize, which again, impacted our margin for the quarter.

Over the past two years, the industry's expectations of R-22 price increases have not yet come to fruition despite the efforts by the EPA to reduce the supply of R-22 in the market. While we cannot predict the timing of sustained price increases, we will continue to focus our efforts to grow our revenues and profitability, such that when the industry supports increased refrigerant pricing, we will be in a stronger position to further grow revenues and profitability.

Our revenue growth during the quarter was achieved without a material increase in reclamation. In fact, the industry overall has experienced a 20% decline in the volumes of R-22 reclaim since the 2008 levels. We believe it is the direct result of a decline in the price of R-22.

Our principal cause of this decline is that despite the EPA phaseout of R-22, there's clearly an oversupply of R-22. However, there's some very encouraging activity underway at the EPA that progressed during the quarter and could have a very positive impact on our industry for 2012. The EPA is currently evaluating the current phase-down schedule for the production and importation of R-22 and has solicited stakeholders' comments on whether it should revise the phase-down levels of R-22 for the 2012, '13 and '14 years.

It is very interesting to read the public comments which are available, and we can send you the link if you need it. All respondents that commented on the R-22 levels have indicated that the levels of R-22 production are too high and should be lowered, so we are not alone, and it is our expectation that the EPA will issue a new phase-down level for the 2012 year in the near future. The bottom line is that this is a very encouraging situation reflecting the EPA's proactive stance on important environmental issues.

We believe the EPA is still committed to seeing the industry achieve a 20% recycle reclaim component of the overall market, representing a three to fourfold growth from today's levels. We look forward to keeping you apprised of the future decisions by the EPA.

Now let me shift over and discuss Hudson Technologies Europe for a minute. As you know, we established a new joint venture called Hudson Technologies Europe for the development of reclamation, remediation and energy automation services throughout most of Europe, the Middle East, and North Africa.

Just to recap for everyone why this is exciting, with the strict regulatory environment and high energy prices in Europe, there is growing demand for energy saving solutions for commercial steam, air-conditioning and refrigeration systems. Our ability to identify and capture inefficiencies and deliver savings for these systems position us well to establish Hudson's products and services and grow market share in these new geographies.

Likewise, we see an opportunity to grow our reclamation business through the new joint venture by taking advantage of Europe's accelerated refrigerant phaseout schedule which has completely phased out the production of R-22 refrigerants, so that existing R-22 systems can only be serviced with reclaimed or recycled refrigerant.

The European R-22 dynamic is approximately five years ahead of the US, and we have seen R-22 prices in Europe go from approximately $1 per pound to $30 per pound.

Finally, through Hudson Technologies Europe's energy optimization and reclamation efforts, we will work towards completing offset projects that should have high value in the carbon credit markets.

The joint venture is advancing on several fronts, and we expect it to begin operations before the end of 2011. So as you can see, we are driving top-line growth regardless of the timing of R-22 pricing and advancing very important strategic initiatives that are strengthening our positioning in the market. With that, I'll hand it over to Brian to provide our detailed financial results.

Thank you, Kevin. Revenues for the quarter were increased 49% to $11.9 million due to an increase in the number of pounds of certain refrigerants sold, offset slightly by a decrease in the average selling price of certain refrigerants. We also saw an increase in the number of Refrigerant Side Service jobs completed during the quarter, as well as an increase in the average revenue per job.

Gross profit margins decreased to 12% for the third quarter of 2011 compared to 23% in the third quarter of 2010.

During this quarter, we have recognized gross margin compression primarily due to the decrease in the sales price of R-22 in the third quarter, which we believe is a consequence of the oversupply in the market.

Operating expenses increased during the quarter to $1,463,000 compared to $1,406,000 in the third quarter of last year, primarily due to an increase in professional fees and bad debt expense. We reported a net loss of $113,000 or $0.00 per basic and diluted share for the three months ended September 30, 2011. compared to net income of $200,000 or $0.01 per basic and diluted share in the third quarter of 2010.

During the first nine months of 2011, we realized revenues of $40 million, an increase of 22% when compared to last year. The increase was due to an increase in the number of pounds of certain refrigerants sold, as well as an increase in the average selling price of certain refrigerants. We saw an increase in R-Side Service jobs primarily related to the number of jobs completed when compared to last year, offset by a slight decrease in the average revenues per job.

Gross profit margins decreased slightly to 19.5% for the first nine months of 2011 compared to 20.2% for the first nine months of 2010. Operating expenses for the first nine months of 2011 increased to $4.3 million compared to $4 million in the same period of last year, primarily related to an increase in professional fees and payroll expenses.

We reported net income of $1.8 million or $0.07 per basic and diluted share for the nine-month period compared to $1.3 million or $0.06 basic and $0.05 per diluted share for the first nine months of 2010.

It should be noted the reported net income reflects income tax expense of $1,077,000 and $628,000 for the 2011 and the 2010 periods, respectively, which is largely a non-cash charge as a result of the company's deferred tax asset.

Now turning to the balance sheet, some of the historical peaks in our balance sheet are less pronounced as we exit the third quarter, but the overall seasonality of our sales and our cash flows continue. We have seen a gradual return to more historic buying behavior of our customers, and we've seen customers spending their working capital earlier in the season.

At September 30, 2011, we had over $5 million in cash and working capital of $14 million. Additionally, we have more than $7.3 million of availability in our credit facility. We continue to pursue acquisitions and have no plans to raise additional capital. We are working with our lender and others to enhance our working capital facility to help facilitate future revenue growth that we believe will continue. It is our expectation that prior to the expiration of our existing facility, which is June 2012, we will have in place a facility that will meet those future needs.

At this one, I would like to briefly turn the call back over to Kevin for some final thoughts.

As the landscape of our industry continues to change, we remain focused on assessing opportunities to drive revenue and earnings growth across our broad product and service offerings while at the same time increasing our market share through exposure to new markets.

Despite the fluctuations we have seen in the pricing of R-22, we have continued to successfully execute our strategy for double-digit revenue growth.

We are encouraged that the EPA is currently reviewing the phase-down of R-22 and look forward to the 2012 rule in the near future.

The industry has clearly voiced their well-founded opinions in the review process, and the overall industry, including Hudson, is sharing the same prospective. We believe the establishment of Hudson Technologies Europe will provide significant growth opportunities and exposure to untapped audiences and expect that our European-based operation will be up and running this quarter and accretive to earnings in 2012.

We remain confident that we're in a solid position financially to support our growth, while we continue to effectively pursue our long-term strategies. Operator, we will now open the call for questions.

(Operator Instructions). Pat Delaney, UBS Financial.

Kevin, what's the total annual compensation package for you and Brian? And additionally, what are we paying for investor relations? I see you've had Mr. Nesbett for some time.

The officers of the company have a base salary and then on an annual basis, are reviewed to determine if there would be any additional compensation. And so, I believe Kevin's base salary is like $220,000 or -- $220,000 maybe, and I think mine is about $199,000. So that's the only amount that let's say guaranteed if that's the right way of saying it. And then any additional compensation is reviewed annually and measured by the board -- independent members of the Board of Directors.

And in the past you had bonuses. I remember in one of the conference calls, there was some suggestion of bonuses. Is that being considered this year?

Each year, the independent members review the total compensation and there could be cash bonuses. There could be bonuses in the form of non-cash. There could be a combination of those.

What's the most recent compensation in that vein?

I don't know the exact numbers from last year. There were only last year cash bonuses. I believe those were issued in about March of 2011. I'm not certain the dollars amount, but I know it's been disclosed.

Okay. And then what do we pay for investor relations -- annually?

Investor relations annually would be under $100,000 that we would spend in investor relations annually.

Okay. Thank you.

Bill [Chang], [Hima] Capital.

I know that you guys use a FIFO inventory method. If you were to use -- have you looked at it and if you were to look at this on the LIFO basis, what would your gross margin be for this quarter?

Well, if we were to use it -- a different method, a non-GAAP method now for us, there would be an improvement in our margins, absolutely. We -- during this particular quarter, let's say on a sales price basis, we saw about a 12% decline in the price of R-22, which has a direct impact on our margins dollar for dollar, gross margins, and also would have a direct impact on our operating margins.

Our buyback into inventory, obviously, would reflect a similar structure, meaning we have seen not only the sale price of a product go down, but we have seen the buy price of the product also go down. And so, it's difficult to say precisely what the margin difference would be, but it certainly would look similar to what we described in terms of the decline in the sales price this quarter.

Okay. Thank you.

Jennifer Wolfertz, Comstock Partners.

Thanks. Good morning. With respect to pricing, could you walk us through what the economics would be as pricing goes up or if pricing goes up in the future -- what the impact would be and the economics would be on the business.

When you say pricing, I'm assuming you mean R-22.

R-22.

Again, you are seeing the negative impact of what R-22 can do when it goes down this quarter. On the flip side of that, what you saw -- what we have to go by is -- obviously has a direct effect to our bottom-line.

But, the thing we would look at is the CFCs in the mid-90s -- what they went -- what happened in price -- how they went from roughly $1 a pound to close to $30 a pound. We see in Europe, R-22 specifically from a revenue point of view go from $1 to close to $30 a pound.

We assume, again -- timing we don't know, but we assume the same type of dynamic can happen here. But we keep looking at it saying even if it's a doubling or a tripling on price, that would be not just the revenue, but clearly we would see improved margins on that. So very significant. So tough to break it down right now, but we try not to get too far ahead of ourselves because the market has been unpredictable on R-22 up to this point. But for us, a doubling, tripling or more on the revenue line, improved margins are clearly something we don't really expect. So we think it's significant.

Okay, great. Thank you.

(Operator Instructions). Jeffrey [Lin], Invemed.

Good morning. My question is on the international joint arrangement that you have and the fact that Europe is so much higher on the R-22. Can you talk a little bit more about how that joint venture is going? What's your expectation level in terms of revenue opportunities as you look out into 2012, so we can get a sense as to the international business, which clearly has a more favorable environment, is likely to help you guys in 2012.

When we look at the joint venture, there were a couple things that were very appealing to us. One is, very clearly, as much as we have we think worldwide the best technology on the energy efficiency for one, we believe as far as reclamation, we're the largest in the world, actually. So from our technology even on that end we have an advantage.

The one thing we didn't have is we didn't have a very good partner. And we certainly didn't want to come into this market on our own. So working with the people that we have picked in Europe, safety high-tech, specifically, we think we have an excellent partner to capitalize on what our offerings and technologies are.

So with that, the reason we saw something there was 22 well ahead of us, a good five years ahead of us on the phaseout. Pricing does reflect that. So we want to bring our technology and run after that. We see a couple avenues there. Working with them being in a sister industry to us of getting more 22 and other refrigerants.

When it comes to the energy optimization, the energy optimization is well ahead of the US because it's mandatory systems. We are already deep in meetings with certain government agencies as well as other companies there of doing test cases is, of trying to line them up to do energy optimization projects. Whether it's carbon credits, whether it's just savings on the energy being very high, they are just well ahead. They are very much more receptive than they would be in the US at this point.

So we saw all those things. We don't know which one has the biggest -- we know which one should be the fastest as far as to our bottom-line impact, which would be more on specifically 22.

We have a good avenue there. We have the machines being manufactured. They're going to be running this year. We have a good access to the gas already, so we do expect to be accretive in 2012.

How big that will be, we are not sure. How fast the ramp up is in other areas, we're not sure, but yet we are deep down the energy optimization and already trying to line that up. Again, we think the revenues will be coming after -- certainly secondary to 22 just because we are well ahead of it on the 22 and the gas is there.

But -- so we think 2012 rather than say it's going to be a big year in 2012, we feel confident it will certainly be accretive. It could be bigger than that and -- meaning more than just something marginally profitable. But we are not -- we're only certain of this since we feel very confident we're going to be profitable.

What can happen from the energy optimization, we're not sure how quickly that can happen. We to believe we will be doing job certainly in 2012, but really if you look at it, we think 2000 -- we think R-22 and the other refrigerants that we will be doing can be a big deal over there.

But really longer term, a few years out, we think the energy optimization could be by far the biggest. So just because looking at that market for energy optimization compared to the US with what we are seeing. So we do see -- we see big numbers there potentially if we do our job right.

And when you had talked about here back in the US on the domestic market with the EPA reviewing ways to further curtail the oversupply or the production coming in here, is there any kind of a timeframe? You said in the near future, but is it something where you would expect before the end of the year, before the whole cycle starts to kick in, in the first quarter -- is the expectation that they may have an announcement by December?

Well again, it's a good question. And we do know one thing, okay? So we will go by a couple things. We do know that nobody can produce or import a single pound of refrigerant starting January 1 and on. Okay? So at this point, the whole industry is on hold as far as doing anything for next year. So how long that can go on, we can't imagine.

We can't imagine that something is not going to come out before the end of the year. We can't -- again, do they have the right to do that? They certainly do. I just can't imagine that starting January, not a single pound of gas can come into the country or be produced. And in other words, I can believe it could happen. I just can't believe they would want that to happen.

So we do believe -- again, it's no facts. We do believe that sometime this year; it could be very soon or it could be up to December or so, that something is going to come out with the EPA.

I wouldn't be shocked if it didn't come out very soon, meaning the next couple weeks or month or in December. It could be any of those. We would like to believe it's going to happen before the end of the year just because of where they are situated for next year, not being able to produce.

And because I don't really follow the R-22 pricing, can you just give me again where it was at the beginning of 2011 and where it was -- where it came down to in the third quarter?

At the beginning of this year, there were some price increases announced by the producers. So at the beginning of the year, there was the intent we could say of seeing higher prices closer to the high $4's, low -- to $5 let's say in terms of at the wholesale level.

And then we have seen the prices slip back to the $4 level, particularly in the last let's say from June through the end of the third quarter. So for us since we've seen about a 12% decline, pretty much all of that was reflected in this quarter of this year.

I see. Okay. Well, thank you very much.

[Sal Alternative], a Private Investor.

Yes, I would like to direct the question to Mr. Zugibe. When the members of the board are considering extra compensation, whether it be bonus or participation or whatever it may be, what is the criteria for this extra compensation? Is it the price of the stock? Is it the profitability of the company? Can you give me some insight so I have a better understanding at how the board is evaluating?

Okay. Well, again, a number of things are going to go into really the board's positioning and what they believe the certain executive, whoever it is, is doing. So starting the year out, we come out the previous year at the end of the year with a budget for the next year. Now, with the facts that we have of that year, a lot of things can affect that facts. It could be the price on 22. It could be a number of things that can affect your result.

Now are they explainable? Are they your fault? Are you getting a benefit from something you didn't do? All of those are going to come into performance-based pay. So it's clearly performance-based. They come out. And basically on the facts that we have, we're going to come out with a believable budget, not a sandbag budget. We're going to put a budget that is believable, meaning our board is analyzing the data. So we come out with a budget. We come out through the year. Certain things are going to change.

Obviously, it's a moving number for a lot of reasons. so specifically this year, if we come through the year and at the end of the year they're going to evaluate how did we do the previous year compared to budget, compared to what the obstacles you ran into, compared to what the benefits you were given to say how good our executives did.

Now we want to retain our executives if they are doing a good job. So it's fully documented, in other words the start of the year; it's documented at the end of the year, of what their criteria are. So the board will come to us and say pretty much specifically one on one, each individual director or executive, this is what we believe they did.

Now they come a lot of them from recommendations from me, from Brian to the board. They analyze this. They will make their decisions and come back to us. So there's a lot of facts that come into saying whether you did -- it's not just about I met budget. Well maybe you had a gift that made you meet budget. Maybe you missed budget but the whole refrigerant market fell apart on you. So to penalize one of our executives potentially when they did an excellent job, again, would be silly.

Again, I don't want to lose an executive because the market fell apart but they didn't, so the board knows that.

So what they do is they come in and analyze, whether it's my recommendation, whether it's the facts they know. But again, the start of it comes off of what the budget is, did we meet the budget, did we not meet the budget. And again that's your baseline. But it's not blindly -- you met it, you get this. It's not because there could have been factors that influence this.

So I can't tell you it's an exact art, this is what it should be. We know at the start of this thing, or even right now. To say what I know what the board is going to do at the end of this year, depending on how this year is going, whether we beat budget or not isn't exactly the point right now. That's a lot of it, but really how good of a job are my executives here doing? There's a lot of facts that come into that, so it's not -- I can't tell you it's a -- it's a little formula and this is what they come up with. No, there's a lot of facts that came on.

And again, things are out of some people's control. Some things are clearly in our control and either we did a bad job or a good job and that will come out.

So all I can tell you is this. It starts with a budget. It ends with them evaluating how we did compared to budget, how we did compared to the industry. So they'll look at other companies how they did in this; how the budget reflects what we did; and so it's not just did you make money you get this; if you didn't, you don't. It's not.

And again, I want to retain some of -- my executives here. That's why we picked them; that's why they are here. And again, the ones we have right now I think do a very good job.

I think in this market, say, as bad as numbers look, we would look at the margins for the third quarter. Very disappointed with the margins. Compared to market, though, compared to what happened in our industry, that was not easy. We used a lot of things to even keep ourselves at the volumes we did.

We were able to jump up, have more customers, more volume because of the executives we have. The last thing I want to do is punish them because the market dropped.

So again, it's not a gift. It's always difficult when I have to present something to the board, but the board is very sharp and the board does go through the numbers to find out. But it is a comparison off of the original budget we put in.

Well I have been a stockholder in the company for three years and I have friends that I brought in; we have over 1 million shares.

And from the first time we bought the stock, we heard great stories. We need the weather. You had last summer and you had the hottest summer on record.

Then you needed money. You raised $5 million for acquisitions and this and that. The bottom line is, it's all about making money. And you can be the nicest guy in the world, but if you don't make money for the stockholders, how can you justify any extra compensation? We understand there are misses and there are misses, but look at the price of your stock. You can't explain it any other way. The price of the stock, why don't you let compensation be granted which many large companies do based on the price of the stock? That's how they are compensated. You can take $100 million as long as the stockholders participate also. But all of what you said doesn't mean anything. The bottom line is, look at the stock.

Again, I understand the frustration. I understand where you are coming from. For the last three years, as you have shown, if you watch what happened to our market, not Hudson alone, our market, you would see the result of what happened in the last three years to this (multiple speakers)

When I first bought the stock and we heard -- I believe it was from Mr. Zugibe, I'm not sure. We were told, well, we know R-22. It's happened before. We've got it down pat. We've got the inventory. We've got everything down pat, and now all we hear is excuses.

Well, again, I don't know what to tell you. I guess you can hear anything in my words. You heard it again today. I said this is what CFCs have done.

But that's okay, but why can you justify these bonuses? (technical difficulty)?

Hello?

Yes, I'm here.

Again, there's a number of things. If you look at the performance of the people in our company, it can look on its face to say you basically didn't perform. Look what the stock did. And I agree with that. I understand that.

The fact of the matter is, Hudson did much better than the other companies in our industry. The industry itself --

We didn't invest in these companies. We followed what you said when we gave you our money. And it's not like we are -- because you indicated early on well, we've had experience with these sharp guys. They come in, they run the stock up, and they leave. We've been in this stock over three years now. And we get -- we go from one excuse, one opportunity to another. Take one and make it work.

Okay, well, I'm just going to tell you the industry doesn't work as simple as that. I understand why you are saying that, but the fact of the matter is this, no one in this company ever said next year the price is going up.

We do believe, and as I said today, we believe we have the facts of the CFCs, Europe, other products that have been phased out -- that they will come up.

Is it going to be 2012? Just as we have said in the past, I don't know if it's 2012. We believe things are lining up for good things.

The economy dropped down. If you think that the temperature doesn't affect our overall industry, well again, I don't know what to tell you there because it does. And every company from the producers to other importers to distributors got the same effect. It's not Hudson.

But the fact is this, I would lose all of the best executives that I have if now I treated them and said you did an excellent job. You grabbed our market share. Our revenues are way up even though the sale price is way down. Obviously, we sell more pounds. We absolutely have more customers. We have expanded. We've done all the things that we can that we can control. Other things that we can't control, like the price on R-22 or other gases, we can't control that, so we tried to make the best of it.

So each year there's been reasons why the EPA is all involved now saying, hey, we've got to fix this. The rest of the companies in the industry are just like Hudson. Everybody is getting killed here. The price on 22 is backing up. Reclaim is backing up because 22 price is so low.

Now clearly if -- my board I would be very upset if they penalized the other executives for the fact that R-22 price came backward and we paid here.

Now, if I don't take care of executives that are doing an excellent job to position us, I will lose them. The fact is this, it will rebound. And 22 price will come up. And when it does, we're going to be in the best position because we have more customers now. We moved more volume. Well what you're seeing is since 2008 is the price on 22 coming backwards and us being penalized and the whole industry being penalized. I can't penalize our guys and say find another job, guys, because we are not going to reward you for the fact that you increased our customer base, increased our pounds, positioned us for when 22 finally stabilizes, we can take off. Again, I can't lose my best guys because I'm shortsighted.

I agree, it's tough on the stock. I feel very bad about that. All of us do, and we know we're living for the stock price. That is where our focus is, but we can only do so much other than -- we can do the things we have control over. That's really what you look at internally here to say if someone is doing a good job. We have more customers. We sell more volume. We're doing everything we can to control our destiny here.

We can't control the price. That is our margin. That's why you see the margin back. Our revenues are way up. We're doing a good job in all those areas. But the 22 price specifically is significant to us. And it will be significant when it goes the other direction. And again, we don't have control of that and I can't penalize my guys for that.

Walter Young, Thompson Davis.

Hi. My question is how would you characterize the potential acquisitions that you talked about? And my editorial comment is that I consider your compensation pretty modest as well.

We've talked over the past few quarters of sort of three areas we're looking at beyond organic growth. And just to go back to organic growth and think about the fact that we have been growing at double-digit rates for going back eight years now in a market and an industry that is not growing. So I think, again, from a performance perspective, we have outperformed the overall market.

But specifically to the non-organic areas, we talked about acquisitions in the refrigerant industry. And really in the refrigerant industry, as reflected in our financial results and as we talked about, is somewhat in turmoil relative to valuations. What is the value of cash flows? What is the value of allowances or allocations held? It's very difficult right now to measure.

There's been lawsuits. There's threats of additional lawsuits. The EPA still has to come out with a rule for 2012. It's a very difficult set of circumstances. And we certainly don't want to make a bad acquisition or a bad decision or a waste of the shareholders' money. So that area of the business has been put on hold in terms of acquisitions, sort of the first of the three prongs outside our organic growth.

The second is us looking at opportunities to go outside the United States, and for a very reasonable amount of capital, we entered into a joint venture with a company -- two companies actually that have operations in Europe that we helped -- we expect to help jump start that joint venture.

So we are still looking at those kinds of opportunities in the form of joint ventures or partnerships to expand our reach outside the United States.

And the last of the three outside of organic growth that we're looking at are sort of ancillary or similar businesses that would utilize our infrastructure or help utilize our infrastructure in the refrigerants and the energy optimization areas and look to grow in that area. And we're spending more time in that particular area today because that is a little bit more stable environment. There's a little bit more predictability about valuations and so forth. And that's the area I think we're focusing most of the three right now.

Would that be in the US?

That would be domestically, yes.

Okay. Thank you.

Jim Kennedy, Marathon Capital.

I just wanted to throw my hat in a ring on that prior discussion about compensation. I agree that the compensation seems reasonable based on the job that you all are doing. And I would caution investors in general to tie one's compensation to the share price simply because that would incent you to do things different than run the business as efficiently as possible. So I'm not -- I definitely don't agree with tying compensation to a share price. And if there is any piece of it, it should just be a small percentage of your compensation.

With that said, I just wanted to drill down a little bit more on the European piece. Can you talk a little bit about -- now that it's this far along and I forgot how many months at this point, what you found now that you are let's call it on the ground or beginning to do business there, in terms of the cost structure you anticipated and what you now see in terms of being involved in Europe?

In terms of let's say cost structure, the acquisition cost of R-22 continues to seem to be more favorable -- positively more favorable than what we see here in the United States.

So, to kind of draw a comparison as to maybe why -- back in let's say the mid '90s, at some level, most refrigerant holders initially looked at refrigerants as a liability, not as an asset. So in the early days of reclamation in the United States, often, someone was happy if you took product from them and took it off their hands. Then over time, and fairly quickly, let's say one to two years, people began to realize that wait a second, this really could be an asset. And ultimately we found that nearly all cases now, we pay for what we call [thorough] refrigerant use, recovered refrigerants which we recycle and resell.

The European market is still operating similarly to those early days. We thought by now we might see people looking at refrigerants as assets as opposed to liabilities. So, so far, things seem to be favorable.

But at the end of the day, going back to Europe, what's sort of outpacing expectations is the pricing on R-22. The pricing on R-22 has gone up much more dramatically I think than we thought possible at this point in time. It went from like $1 to $6, $6 to $12, $14 to $16 to up to $30 now. So it's ramped up pretty quickly. So the spreads in Europe specifically on R-22 seem to be much more significant than we would have expected or anticipate. And as a consequence, the margins in the joint ventures should be better than we have seen here in the United States.

I think the other aspect that has been positive is the energy side. There seems to be, at many different levels -- we know Europe and European governments that have difficult -- financial difficulties right now. But there are quite a number of funded projects already on the books relative to energy optimization. And a lot of the European utility-based companies also have programs better in a way for us than the programs we see utility companies in the United States in that energy optimization even from what's in the United States deemed to be maintenance, is important and is supportable.

But at the end of the day, the most important part of this is that a grouping, a large number of corporations, have a legislated, regulated mandate to lower their energy consumption. And they are seeking out programs like the types of programs we offer. So the energy optimization let's say adoption of that principle, that idea, again, is probably a little more advanced even than we thought sitting here in the United States looking at Europe.

Brian, what do you all bring to that energy optimization process or approach that folks over there don't? What are we doing better, or what's not available in Europe that prompts us to want to be over there in that space?

Well, again, what started us down that path as far as knowing that we can affect the efficiency end was what we found from our patented technology, and so our patented technology and installation at the speeds we can brought us down a path to develop other patented technologies, which was our computer models. So what you find is the refrigeration systems specifically, air-conditioning, refrigeration for big buildings, for petrochems, for other factories, large energy users and our patented technology, allows us to bring -- is really to increase the efficiency where others couldn't have. So it's very difficult to identify where certain inefficiencies are coming from.

Our software not only identifies it, but our processes with our chiller chemistry, we can rectify it. So what we found is when we do this, we are seeing systems that look like they are okay because they're absolutely producing a cold temperature, a cold product. But how much energy are they actually using and where is the problem, and most people are not focused on a specific area of the system, and in fact no one is focused on that area. So we patented a model. We've got -- we've said savings all over the US for that.

But again, because energy efficiency is really mandated there, it's -- everyone's eyes are opening up to how much we can save on systems that they weren't focused on that area. And even if they tried to, how to find where the problem is this what our software is about. So that was a piece of it.

A lot of these same exact systems were driven with steam. So if you look at what we did in the US, steam is one of the biggest users of energy really worldwide. In the US, about $200 billion a year in energy. We became one of the steam experts for the Department of Energy. So basically, the envelope got bigger.

So it's not just the refrigerant side of the system; it's the system. But then it gets further and says it's the driver to the system which can be the steam. So if you look at where the big energy users of big plants, could be the big refrigeration system. It can be the steam.

So those two big users, Hudson is an expert. So even for the Department of Energy, we are really one of only two experts the Department of Energy has to train the other experts. So we found a path here to say those two together bring something that no one is focused on. And we want to run with that. So what we did is we tied up with some guys that are actually in the government there administering the environment, and really they get real excited because they want to save energy and no one is really focused on that specific area of the industry.

Got you. And then in terms of longer term, I'm hearing a software solution. I'm hearing a consulting solution. Does this look like a much higher-margin area? And if so, why?

We think what will happen as this develops is there will be more predictability and sustainability of the revenue streams, like annuity-based revenue streams that should come out of this. And --

Brian, was that -- let me ask you -- is that because you're going to share in energy savings? Or is that because you are selling a piece of software with a maintenance on it, or because you are doing consulting? What is kind of the business model in your mind at this point?

It's because of the consulting, but it's the dynamic nature of these systems, meaning these systems that begin to deteriorate over time and evaluating them periodically is important to determine as and when they are kind of coming out of an efficient mode and returning to an inefficient operation.

And because there is the strong interest to sustain and not have a one-off event, meaning sustain the energy savings and optimization, we look that there will be a continuous relationship between our services and the system and the system owners.

As it relates to shared revenues or shared savings, we are still looking at that option. It's not an option that we feel comfortable that we have a solution towards because of the legality and because of certain operating conditions that a customer may or may not perform that could affect the outcome. But it's still something that we are looking at. And there are contracts such as that in Europe already, probably more so maybe than what we have seen so far in the United States.

Got you. Okay. Thanks a lot, guys.

Thank you. There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Thank you. Well, thanks, everyone, for participating this morning. And we look forward to speaking with you after the close of the fourth quarter. Thank you.

This does conclude today's teleconference. You may disconnect your lines and have a wonderful day. Thank you for your participation.