Hudson Technologies Inc (HDSN) 2011 Q4 法說會逐字稿

Greetings and welcome to the Hudson Technologies' fourth quarter and year-end 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 2011 fourth quarter and year-end. On the call today we have Kevin Zugibe, Hudson's Chairman, Chief Executive Officer and Brian Coleman, Hudson's President and Chief Operating Officer. Kevin will review the Company's business operations and future growth strategies. Brian will review the financials, and immediately thereafter, we'll take questions from our call participants.

Let me take a moment now to read the Safe Harbor statement. Statements contained herein, which are not historical facts, constitute forward looking statements and 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 other -- 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 refrigerant, including unfavorable market conditions adversely affecting the demand for and the price of refrigerant, the Company's ability to source refrigerant, the regulatory and economic factors, seasonality, competition, litigation, the nature of supplier or customer arrangements 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 use of life of the assets, potential environmental liability, 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 under reliance on these forward-looking statements, which speak only as the day the statement was made. With that, I will now turn the call over to Kevin. Go ahead, Kevin.

Good morning and thank you, everyone, for joining us today. For those of you that have been following the Company, you know it is an exciting time for us and the excitement is not just related to the record revenues we achieved in 2011. For the last few years, we've been talking about an anticipated shift in our industry related to the EPA phase out of R-22, which we believed would yield significant benefits to Hudson.

Recent actions by the EPA that have significantly reduced the amount of R-22 that may be produced in 2012 have completely altered the current supply-demand dynamic of our industry. Literally within hours of the notice from the EPA, that it was reducing the virgin supply of R-22 in 2012 by 45% compared to 2011, the price of R-22 more than doubled. We believe that the growth opportunities that we have been preparing for and sharing with our shareholders for several years are now at hand. As a result of these recent developments, we believe we have reached the inflection point for growth in our revenues and earnings.

It is our opinion that we are at the beginning of sustainable price increases. When you consider that with each of the previous -- of the two previous phase outs, the CFC phase out in the US and the HCFC phase out in Europe, that within only a few years it was a nearly 20- to 30-fold increase in price, you can begin to see the potential for R-22 pricing as it begins to be further phased out. With the price of R-22 more than doubling, we have seen a broad awareness and concern from our industry stake holders regarding anticipated shortages of R-22. Our customers are recognizing that there may soon be a shortage in the virgin supply of R-22 and their only long-term solution to this supply shortage is to source reclaimed refrigerants. We believe that the confluence of these factors will drive growth in both of our revenues and profitability. I'll provide more on our perspective on these changes we've seen in the last few months a bit later in my comments.

But first, I'd like to take some time to discuss Hudson's achievements during the past year. As you've seen in this morning's release, we have again achieved record revenues of $44 million in 2011, representing organic revenue growth of 19%, and we have now posted record double-digit revenue growth in five of the past six years. Throughout 2011, we saw solid demand for all of the refrigerants we provide. It is important to note that we have achieved these record revenues in 2011 despite the fact that the sale price of R-22 was lower than in 2010 and remained below the previous peak in pricing in 2008.

We've been able to sustain our revenue growth by providing field and reclamation services, which complement and enhance our product sales. The services we provide remove the commodity aspect of the product sales, which, in turn, helps to strengthen our relationship with our customers. Through our service offerings, we have also been able to expand the breadth of our product sales to our customers, which has led to a nearly doubling of our revenues over the past five years.

Gross margins for 2011 were slightly lower than 2010, which is attributable to the price decline in R-22. Through 2011, the depressed pricing of R-22 had a negative impact on our gross margins, yet despite the adverse pricing dynamics in R-22, net income grew to $1 million or $0.04 per basic and diluted share in 2011, as compared to $700,000 or $0.03 per basic and diluted share in 2010. While externally, the market price on R-22 worked against us last year, internally, we secured more customers, moved more volume, and enhanced our foundation for future growth. So, we believe our 2011 operating results were much stronger than our net earnings would otherwise indicate. But, I'm sure that most of you who are listening today are more interested in learning about the changes that have occurred in our industry since the beginning of 2012 and how we anticipate that these changes will impact our Business.

On January 4, the EPA published a proposed rule that provides for decreases in the annual allocations for the production and importation of R-22 relative to the EPA's prior December 2009 final rule by a range of between 11% and 47% per calendar year's 2012, '13, and '14. The proposed rule will not be final until later this year. But in the meantime, the EPA issued No Action Assurance letters in mid January to the allowance holders that can produce or import R-22. Under the issuance of the final rule governing 2012 R-22 allowances, the EPA's No Action Assurance letters limit the production and/or importation of R-22 in 2012 to an amount equal to the maximum reductions set forth by the EPA in the proposed rule. Representing an approximately 45% reduction from what was allowed to be produced or imported in 2011. So, as a result of the issuance of these letters, the industry sought immediate and dramatic increase in the price of R-22.

Currently, the retail price of R-22 is above $12 per pound, compared to pricing around $5 per pound for 2011. There may be different pricing throughout the chain, but when we discuss pricing it's really best to view the pricing dynamic or on a trending basis. Whatever your reference point is on the price, you should have noted a more than doubling in price when compared to last year. While we don't specifically share our pricing for competitive reasons, we can say that based upon the costs of our inventory and the current pricing, our gross margin will certainly improve when compared to historical results. Consequently, we do expect to report higher revenues and profitability when we complete the 2012 season, compared to historical levels, due to the fact that we build inventory in advance of the sales season.

For forecasting purposes, I think it's important to point out that R-22 prices increased at the end of January after the start of the fist quarter, and we did honor certain short-term pricing arrangements that were in place at the start of the year. Therefore, our first quarter revenues and gross margins will be derived from a variety of pricing points so that the average for the quarter would not equal the current pricing levels. Also, while the industry reacted rapidly to the EPA's No Action Assurance letters, the longer term impact on R-22 pricing will not be fully known until after the EPA issues a final rule setting allocations for 2012 through 2014. Therefore, we are managing our inventory more conservatively than usual.

While it might be tempting to quickly sell our products at these higher prices to speculators and commodity traders, we expect to continue to provide products and incentives to our customers who support our reclamation and service efforts. We believe the most important way to drive sustainable growth for our Company in 2012 and beyond is to work through any supply difficulties that may occur during the height of the cooling season, which is typically during the second and third quarters.

We believe working closely with our customers during difficult times will make each of us healthier and more profitable in the years to come. We anticipate that the second quarter will be more reflective of the full impact of the current increased pricing of R-22. Consequently, our financial performance in the second quarter should be better than the first quarter. Additionally, we anticipate the possibility of additional price increases this year as we enter the season of peak demand for R-22, which would also improve financial results as we move through the refrigerant sales season. Therefore, as with any year, it is important to view our financial results over a nine month period, not on a quarter-by-quarter basis.

This year's refrigerant sales season should also prove interesting for the replacement refrigerants. Much has been written and discussed regarding the dry ship condensing units and drop-in substitutes for R-22. While we see a benefit in R-22 sales for dry ship units, we believe that there may be a decline in the sale of certain of the next generation refrigerants, such as R-410A, which has been one of the products that have helped to sustain our growth in revenues. For the moment, we do not see a strong market demand for R-22 drop in substitutes, but we will be keeping an eye on all these factors as we enter the refrigerant sales season. Each of these various factors and others are what makes any particular year challenging. The most important thing about this recent price increase is that it creates a favorable market environment for the growth of our reclamation business. Higher R-22 prices create an economic incentive for contractors to capture dirty gas rather than vent it, providing Hudson the opportunity to reclaim and recycle the gas to virgin specifications. Then resell the gas in the marketplace to fill the supply gap that is being created by the EPA as R-22 production phases out.

For the last few years, we've focused on enhancing our leadership position in reclamation through the development of our proprietary technology, dedicated reclamation facility, and robust distribution network while we've waited for the price increases that would make R-22 reclamation attractive. We're ready to begin capitalizing on reclamation opportunities. As we have stated in the past, we believe Hudson is the largest reclaimer with approximately 20% of the market share. In 2011 when R-22 was $4 per pound, the entire reclamation market was around $32 million, really pretty small. As the price of R-22 increases, we would expect the volumes of reclamation to also increase, and with that increase, the overall profitability of Hudson should grow as well.

To give you a sense of the potential, if R-22 sold at the wholesale level at $28 a pound, a price which is not unreasonable based on prices from prior phase outs, the overall reclamation market could reach in excess of $800 million in revenue. Based on our market share, at such levels, we could expect to see a tripling of our revenues. Since we don't know what the price increase for R-22 will be, we cannot guarantee this performance, but certainly there is the potential for this type of outcome. We don't want to get too far ahead of the opportunities since reclamation typically takes place during the summer months in the heat of the season when systems are being worked on. We will have a better sense of the reclaimed volumes coming back from contractors at that time. However, I will say that we are encouraged by the inquiries and discussions we are having from partners and customers.

We believe that our platinum program is the best reclamation program in the industry. The platinum program is designed to make it very easy for the contractors to return and get paid for the gas. We look forward to being able to update you on this progress with the business later this year. We have worked hard to position ourselves to take advantage of the changing dynamics of the refrigerant marketplace, and we are pleased that the industry scenario that we envisioned is from all indications finally becoming reality. With that, I'll hand it over to Brian to provide our detailed financial results.

Thank you, Kevin. As we've indicated in the past, due to the seasonality of our Business, the fourth quarter is typically our weakest. Revenues for the quarter decreased 7% to $3.9 million, primarily as a result of reduction of the refrigerant-side service revenues. Last year, we saw some of our service jobs move into the fourth quarter of 2010. This year's fourth quarter was more indicative of historical volumes of service revenues. Gross profit margins decreased to 21% for the fourth quarter of 2011, as compared to 33% in the fourth quarter of 2010. We saw gross margin compression in the fourth quarter, primarily due to a reduction in the service revenues and the timing of the work performed this year versus last year.

Operating expenses decreased during the quarter to $1.8 million, compared to $1.9 million in the fourth quarter of last year, primarily due to a reduction in sales commissions for the 2011 period. For the quarter, we reported a net loss of $722,000, or $0.03 per basic and diluted share, compared to a net loss of $556,000, or $0.02 per basic and diluted share, in the fourth quarter of 2010. For the year ended December 31, 2011, we realized record revenues of $44 million, an increase of 19% when compared to last year. The increase was primarily due to an increase in the number of pounds of certain refrigerants sold. During the year, we saw a decrease in refrigerant side service revenues, primarily related to a decrease in average revenues per job completed, offset by an increase in a number of jobs completed compared to the same period of 2010.

Gross profit margins decreased slightly to 20% for the year, compared to 22% in 2010, primarily due to the reduction in the sales price of R-22 when compared to 2010. Operating expenses for the year increased to $6.2 million, compared to $5.9 million last year, primarily related to increased professional fees and, to a lesser extent, an increase in payroll expenses. Reported net income of $1.034 million or $0.04 per basic and diluted share, for the year, compared to net income of $701,000, or $0.03 per basic and diluted share, in 2010.

Now turning to the balance sheet, at December 31, 2011, we had working capital of -- we had $4 million in cash, we had $17.7 million in inventory, and we had working capital of $12 million. Additionally, we have more than $7 million of availability within our credit facility. Our balance sheet and the [supply gap] in 2011 was similar to prior years. (technical difficulties) We are satisfied with our current working capital levels, but we're in the process of expanding our working capital credit facility. We are working with our lenders and others to enhance our facility, which in turn will help facilitate future revenue growth. It is our expectation that prior to the exploration of our existing facility, which is June 2012, we'll have in place a facility that will meet those future needs. At this point, I'd like to turn the call back over to Kevin for some final thoughts.

Our engineering and technical strengths are significant and recognized globally. We are predominantly a US-based Company, but we are introducing best practices in our offerings in other geographies around the world. We have developed patented and proprietary equipment and services in each of the areas that we operate. With these strengths, we have developed comprehensive offerings which include reclamation, field remediation, energy optimization, and customer engineering which separate us from the others in the marketplace. Our strengths and advantages are getting more pronounced every year and will become a big driver for Hudson's growth in the market.

It is a very exciting time for our Company. We've been carefully planning and preparing for this industry shift for several years and believe we are well positioned to add customers and to drive revenues and earnings growth by capitalizing on our ability to provide this by the right solutions for our customers. While we are obviously not just an R-22 company, the recent R-22 price increases enhance our overall growth strategy and will specifically drive the growth of our reclamation business by making the reclamation of dirty gas the only viable solution to fill the supply gap. We remain confident that we are in a solid position financially to support our growth while we continue to effectively pursue our long-term strategies. Operator, we'll now open the call for questions.

Thank you. (Operator Instructions) Greg Garner, Singular Research.

Thank you for taking my question. In just looking at how this market may expand for reclamation, you mention it could grow up to three times, but let me just run something past you and just want to hear what your comment may be. If there's 45% reduction in virgin gas, which means that 55% needs to be taken up by the reclamation and only 5% to 7% was reclaimed, it seems like it might be a 7% to 10% increase in reclamation volume alone without any change in price. But, maybe there's some replacement even if that declines to some extent, it seems like there still could be four, five, six times increase in reclamation this year. Is that, I just wondered -- that's how I was looking at it without any price change. How does that fit into -- am I missing something here?

Well, when you look at the EPA's proposed rule that was issued very early in January, I think the fourth of January, they also are trying to take into account the effects of any stockpiling that may have occurred.

Okay.

And, we certainly think based on the activities over the last two years in terms of pricing for the 2010 and the 2011 year, there were price decreases. There seemed to be more than a sufficient amount of supply of 22. You know there were questions about demand, questions about stockpiling. At the end of the day, the EPA seems to have in the proposed rule, tried to address the issues around stockpiling, and I think at some level is the reason for the higher reduction. As we get through the season, I think we'll all understand some of those impacts better.

When we talk about reclamation and a growth in reclamation, we're tying our words and language back to what the EPA has [seeked]. This goes back to the original 2009 rule. The EPA's words would have been something to the effect they want to have a smooth transition as we phase out R-22, and that they are looking for an expansion of the reclamation market to represent about 20% of the after market. Their goal for all that really relates to future phase downs as at some point in time there will be a limitation in the amount of virgin production relative to the overall demand and reclamation will have to make up that difference otherwise they would expect serious market disruptions.

So, if reclamation only eventually amounts to 20% of the total after market, then obviously competing technologies or substance -- competing solvents or, maybe that's not the right term, but competing R-22 compounds are going to take up the slack or retirement of current systems?

I think at some level, [work] thinking about percentages may not necessarily be the best way to look at it. The other alternative would be pound. So, the EPA tagged the word 20%, but they also said that's about 27.5 million pounds. The amount of gas that's been reclaimed at the peak was '08, about 10 million. So, you might say there could be a two to three-fold growth in reclamation, but there will be a reduction in the overall consumption of R-22 over time. You know, these systems tend to last a long time, but if you say they last 20 years, well then 5% would come off every year in theory if everything worked smoothly. Now, it probably won't work quite that smoothly, but there will be a reduction in demand at some level. There will also be replacements and retrofits and drop-ins and the like, other alternatives as well.

The two things that obviously muddy up the water somewhat for us for the industry is, as Brian said, roughly if you went on a 20-year life on a unit, you'd say 5% attrition rate on these units, and that would be logical. But, in addition to that, we've seen something that-- whether people thought it was going to happen or not, the fact of the matter is a ton of new units are going out every year. These dry shift units of new 22 units that theoretically would have a 20-year life. The percentage that we're hearing going out seems to be higher than what an attrition rate should be. So theoretically, the demand may not be going down as quickly as one would think. So, on one hand that.

Then the second is, in the CFC phase outs, originally in the '90s, there were drop-in replacements. We did not see that ever become a major percentage of the change outs. So, it didn't really lead into hurting reclamation for the CFCs, whereas people prefer to use the CFC's still. When it comes to the 22, the difference, too, is where 12, say for your cars and all of that, went to 134A, or even on a chiller went to 134A. Similar drop-ins, wasn't the exact drop-in, but they were similar in pressure. Most units could have been retrofitted where 22 can't go right to the new refrigerant 4-10A. You can't put 4-10A in a 22 system.

So, not saying that retrofits won't have an impact of other refrigerants, meaning it can have some. Will it be substantial? We didn't see that in the CFC's. We think there'd be less reason to have it for these, meaning the new gases can't be used in it. You have two things skewing this on us, and that is the availability of pounds, and really -- meaning the demand is possibly not going down as quickly. Secondly, the industry's never really gone to replacements full force. Not saying you couldn't, but we really don't have a clear answer on this. We can make the argument as to why reclaimed pounds will be eventually 100% of the market, and the market may not go down as quick as what people would think.

Can you tell me anything about your capacity in reclamation, reclaimed pounds?

We had been viewing and looking for growth in reclamation back in time, '08 and then certainly in '09. We certainly expected with the initial phase down of R-22 in January 1 of 2010 that there would be this growth in reclamation. So, we did invest a fair amount of capital back then in capacity that we really haven't turned the lights on in a couple of years. So, we do have a built-in, a ready excess capacity. We're certainly not operating what we do run at full capacity. So, we feel that there's a certain amount or sufficient amount of excess capacity available to us based on all of the comments that have come in, it does appear industry-wide there is sufficient capacity so that the EPA can obtain or meet that goal of 20% market serve, let's say, by recycling reclaimed refrigerants.

Would it be safe to assume that your reclamation capacity could be double that of what it was last year? Would you be able to meet that if that kind of demand came in?

Yes. Again, there's a lot of things we could do. We certainly right now are just running on one shift, so there's a lot of things we could do. We definitely think if there's significant growth, we have the capacity to handle that.

Clearly, we believe it could be north of that. Just even, as Brian said, running on a second shift. But again, and the beauty of the systems that we've set up, you know, we don't tout it probably as much as we fell it inside, but our technology's very good on our reclamation, our separation, and some of the other things that we've put in place. For us to beef this up, if we really wanted to, it could be in a short period and it would not be a big half of [the constraint], because we don't have to reproduce everything to say, double our capacity. We don't need double the infrastructure internally in our plant.

It's pieces of it that we would probably -- I know we would jump toward, which would allow to us double, triple, quadruple going in the future. It is not one for one, it is not a -- as far as a capital cost. We don't have to replace everything. We have some room in our facility of some of the equipment that we have that clearly pieces would allow us to expand without really replacing them or even beefing them up. So really, double, triple now and really with a small amount of capital could go north of that.

Okay, and just one last question. I'll get back in the queue. Just about gross margin on the reclamation versus distribution. I presume the reclamation gross margin is much higher than distributing virgin gas. Can you give me any color on that?

The margins are higher. Again, most of our revenues to date are the resale of virgin gas. So, that's why our margins are, let's say, as low as they are, but we certainly make significantly higher margins when we're able to acquire dirty gas. The reclamation process is not that expensive. We've been shipping refrigerants coast to coast to our plants in Champaign, Illinois and paying for the dirty gas and reclaiming it when the price was selling for a dollar or more. The costs are not that significant to reclaim. Really, the issue for us has always been whether or not we can get the gas. Hopefully now with the pricing dynamic that we're seeing, there's now that incentive to finally have the contractors recover or return the gas, and that gas eventually works its way through the chain back to us.

So, if the question's always been relative to whether or not you could get the gas, it leads me to think that if you have the distribution collection in place that you don't necessarily need to gain more customers to gain even a greater market share of the reclamation if there's going to be more reclamation done because of the pricing. Is that the appropriate way of looking at it?

We think so, yes.

All right. Thank you.

Craig Hoagland, Anderson, Hoagland & Company.

Good morning. Could you say a little more about the platinum program, and how conversations with distributors are progressing?

Good morning. The platinum program itself was designed to try and help distributors better understand economics. Because again, the cylinders come in, no one really knows exactly what's inside of them, how much refrigerant is really in there, how much contaminants, are they accidentally mixing two different refrigerants? There's a lot of unknowns that happen, and the wholesaler, distributor received these cylinders from contractors and doesn't really know what's in there and doesn't really know what the economics might be. Ultimately, we try to make the platinum program a very simple, easily understood economic model for our customers.

Also, with regards to all that is to try and provide very good service to those customers, those wholesalers, distributors. We want to make turnaround times quick, easy, efficient. We want to make sure reporting is quick, easy, and efficient. So, there's some level of service associated with the economic model and the economic support. So ultimately, we feel that when a truck is, let's say, loaded up by a wholesaler, they ought to know pretty closely what their ultimate financial gain may be relative to that whole transaction.

Okay. So, that's a program that they've subscribed to that gives them access to volumes and provides you with dirty gas volumes?

That's correct.

Okay.

And again on that, as you're watching this marketplace, what is the pain point for someone? Where do they need us to work with them? The platinum program was designed by listening to our customers as to where their nerves are. Why wouldn't they jump in with both feet? Why were they reluctant over the years? The platinum program was designed that way to say, we're lowering your risk tremendously this way because we have the history and the volumes for a long time now of what does come back.

So, we were able to manage that risk and we had the technology internally that if we did run into things like a cross-contaminated gas, we could split them apart with our technologies. Actually, a number of the services that go down a long way that we bundled it and said we can lower their risk, but is that their only risk? I'm sorry -- is that their only concern? Maybe not, depending on what level we're dealing with. It could be a large contractor. It could be a distributor. It could be anywhere in the chain, but everyone has a different -- a message that they need to hear. We try to work with them, and it could be availability of gas that they are worried about. So, I'll get you more dirty gas if you'll guarantee me a supply of gas. And it could be -- that may be the point.

We bundle this depending on the basic platinum program may look the same, but what we'll tag with it has to do with what that customer's concerns are because we do have a huge advantage from the service end, from the access of reclaimed gas, to the fact that we can take as a platinum program that risk away on the reclamation. Again, when we say platinum, we picture it one way because it's a piece, but internally we don't necessarily picture it that way because any particular customer may get something different depending on his fear level.

Okay. Could you say a little bit about how if the reclamation business were to grow genetically in volumes and/or price, how would that affect your annual cash flow cycle?

In some respects, it might improve the cash flow cycle. One of the difficult things about our industry is it has been very difficult to operate in a just-in-time model. A huge amount of the consumption, maybe 50% of the annual consumption happens in, say, three months. So you think about that, it's very difficult for production and distribution chains to properly balance all that out in a just-in-time way. But to the extent that gas is coming in at some regular volume, then the gas could be going out at some equal number, which therefore, could support more of a just-in-time relationship than the historical practices we've seen. Overall, if that was to play out in a way, we would have less or lower working capital demands on us.

So it could lower the peak working capital, but extend the period in which you're carrying a balance on your revolver?

It's hard to say if it would extend the period, but certainly would lower the peak, absolutely.

(Operator Instructions) Eric Ward, Becker Drapkin.

Hi, guys. Can you maybe talk about what portion of your current inventory is in R-22, and if you were to value that at current wholesale prices what that would be worth?

For competitive reasons, we don't break out the details to our inventory balances and so forth, but if you think about the overall market, and you look at the overall refrigerant after market and R-22 represents at least 60%, if not more, of the overall after market. I think you could model out our business and model out outcomes for Hudson relative to what the market is. I mean, again, because R-22 is such a dominant refrigerant and probably the most widely used refrigerant in the United States, it's fair to say that a huge portion of any particular company in this industry's revenues would be derived from that.

That's helpful. Can you talk about what portion-- let me see, how do I say this nice. Can you give us a sense of how much you did in reclamation business this year? I know that historically you've talked about the 20% of the market, but -- at least I haven't seen a recent market statistic for the amount of R-22 reclamation volume. I'm curious if you can help us out on that front?

The data from the EPA on the 2011 period probably won't be out until maybe May. There's no particular time limit as to when they'll report it, but they will make it public. What -- the way to look at possibly the 2011 period would be ways that we would have characterized our expectations about this year, particularly when we would meet with the EPA. When you look at the trends, and the data is public, I think all the way back to 2000 all the way through to 2010, you'll see actually an increase in the volumes of reclamation, particularly hitting the peak in 2008 where about 10 million pounds of 22 were reclaimed. And, that coincides directly with the highest, let's say, wholesale prices we had seen historically through that whole period of time, which back in '08 was in that $5 a pound range. Since '08, we've seen price decreases, and we've seen a corresponding in 2010, a 20% reduction in the pounds reclaimed. So, 2010 there was only about 8 million pounds reclaimed.

Certainly, we've seen slightly lower prices in 2011 relative to 2010. That would seem to give an indication, if anything, reclamation for the industry would not be necessarily higher than 2010 or evenly in pounds. It fact, it could be slightly lower. So, we don't know the exact numbers. We don't know where the number will come out. It will be reported probably in the spring, but it's likely that the number for the industry was not necessarily higher than it was in 2010.

I don't suppose you want to tell us what amount of your revenue came from that reclamation volume that you did?

The only thing we talk about in terms of reclamation is that as it relates to the reclamation volumes, we believe we're the largest. We have about 20% of the market, and I think you could extrapolate that out based on what we just discussed.

Lastly, can you just talk about the cycle for when you're talking about contractors selling back R-22 to you, from a seasonal perspective, at what point do they -- should we expect to see contractors going out and starting to do that? Is that something that really just ramps up with the standard heating season, or is there some sort of -- does it lag or does it lead?

It's clearly the actual service season, in the heat of the season, and it could be early. Depends on when you first -- you could put yourself in someone's position. Commercial end would be earlier. So we'd see on the industrial commercial earlier, but on the, say, the light commercial, the residential, which is really an enormous portion, could be as much as 70% of the market, those guys, there's a start-up on the system. So, they could be the problem instantly once it gets warm. So, a lot of people do not touch their system. I'd say the average person doesn't think to get someone in until you get some hot days.

We would always say in our industry, you need a series of 90 degree days to get this thing kicked off. So whatever kicked off means, meaning people don't take air conditioning as top of mind ever until it's hot and they go through a couple of days at least. Then they'll call the guy in, and from the very first sign, it could right at the very start of the season, which is very typical to the servicing, the actual recovery reclamation, that would be a prime time. Could be in the heat of the season when a unit is working the hardest because of the hottest days. So, a lot of times you'll have a compressor failure, you'll have other problems that wait in the dead heat of the season. Very rarely will you see it happened at the end of the season where it's tapering down as far as a lot.

We may be receiving it because there's a little bit, as you said the word lag, a little bit from the time they collect it to the time it goes to places who consolidate it for us, and it finally gets into our warehouse. It could be, but it's not a long lag. It can't be very long. People won't be sitting on that gas much. So, the heat of the season is really probably the highest because of failure rates, but at the very beginning, you definitely get an influx at that time. Just depending on what people, when they want to kick their systems on, that's when they'd see the first problem.

Just on the larger systems where we're talking about large industrial applications, where there's large chiller mechanic contractors, there we had that direct relationship, but the predominant part of the market is that residential light commercial side of the house. There we're not working directly with the contractors. The contractor is working with their local wholesaler who then, we work with the wholesaler. They're the aggregation point for all this. So, that's why there's a little bit more of a lag on that side.

Thanks for the color, guys. I appreciate it. Congratulations on the quarter.

Thank you.

Sam Healey, Lamassu Holdings

Hi, guys. I just have a quick question. Last call we spoke about, potentially, revenues from your European operation in Q4. I'm wondering if there are any in there, or if you expect them in Q1, and how you see that ramping? I know the US EPA stuff is exciting, but I just want to keep track of what is going on over there also.

What's happening specifically with the operation out of Italy is we are -- have the equipment up to running. We have on some of the equipment, some of it's not. Some of the energy optimization not yet. Of course, we're selling certain things, as far as running and getting ready for these, basically these [tenders] that they have. In processing for this year, and basically we look at it and said we will sell gas this year, making decisions on when to sell it, where to sell it, what geography to sell it.

Each area of Europe we can access as far as sales. We're not necessarily retrieving gas from all of those areas certainly at this point. We're working toward it. But, of the gas that we he have that have been processed, getting prepped for sale, we'll make the decision over the next couple quarters here. May not be -- it definitely won't be early in the year when the heat of the season is for them, also. That's when we'll get the best price on the gas, and we'll make a decision where it goes, what geography exactly.

So, we're having -- we haven't answered that yet because there's obviously a lot of opportunity. If that's not a difficult one for to us to say, can we sell, it's a matter of where's the best place to move this gas. So specifically to gas, that is our thoughts. For the energy optimization, we have regular meetings going on because we're getting that moving too. We're looking at more technical people to assist us out there as far as the engineering end so that we can train. Moving right along, partners are working very well, all of them, but I wouldn't expect revenues from that early in the year for sure.

Okay, all of my others have been answered. Great quarter. Thanks, guys.

(Operator Instructions) There are no further questions at this time. I'd like to turn the floor back over to management for any closing or further comments.

I just want to thank everyone for participating in this morning's conference call. We look forward to speaking to you after the close of our first quarter. Thank you very much.

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