Hudson Technologies Inc (HDSN) 2012 Q1 法說會逐字稿

And welcome to the Hudson Technologies first-quarter 2012 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer 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, sir. You may begin.

Good morning, and welcome to our conference call to discuss Hudson Technologies' financial results for 2012 first-quarter. On the call today we have Kevin Zugibe, Hudson's Chairman and 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, and Brian will review the financials. And immediately thereafter, we will take questions from our call participants.

Let me take a moment to read the safe Harbor statement. Statements contained herein which are not historical facts constitute forward-looking statements, involve a number of known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.

Such factors include, but are not limited to, changes in the market for refrigerants, including unfavorable market conditions adversely affecting the demand for and the price of refrigerants; the Company's ability to source refrigerants; regulatory and economic factors; seasonality; competition; litigation; the nature of supplier 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 in the useful 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 undue reliance on these forward-looking statements, which speak only as of the date the statement was made.

With that, I will now turn the call over to Brian. Go ahead, Brian -- I'm sorry, Kevin. Go ahead.

Good morning, and thank you, everyone, for joining us today. I'd first like to start by thanking our long-time shareholders who have stuck with our vision for our Company. For the past several years, we've been dealing with the uncertainty as to when the federally mandated phase-out of R-22 would begin to move our industry away from its reliance on virgin R-22, and towards supporting the EPA's goal of a three-fold growth of R-22 reclamation.

Since the beginning, we have built a company with a plan to have the best technology, employees, infrastructure, partners, and distribution network, which would position us as the leader in this industry when the price of our R-22 began its upward trajectory. While we have never wavered on our belief that our plan would come to fruition, we could not know precisely the timing of when it would begin to occur.

We continue to grab market share, expand offerings, and move more volume in anticipation of the significant growth we envisioned. Additionally, we work with industry stakeholders and regulators, particularly during the last three years, to support the EPA's principles of a smooth transition from R-22 and the development of a vibrant reclamation industry.

Well, we do believe the first most important step has begun and have seen significant price increases in R-22, thereby creating real value for used refrigerants. We're very pleased to report record revenues, gross margins of 40% and $0.10 earnings per fully diluted share during the first quarter 2012. As most of you will remember, for the past few years, we've been talking about anticipated shift in our industry related to the EPA phase-out of R-22, which we believe would yield significant benefits to Hudson.

During the first quarter, actions by the EPA significantly limited the amount of R-22 that may be produced and imported in 2012, completely altering the supply/demand dynamic of our industry. As we discussed in our year-end call, literally within hours of the notice of the EPA that it was reducing the virgin supply of R-22 in 2012 by 45% as compared to 2011, the price of R-22 doubled and tripled compared to 2011. Our revenue gain and gross margin improvement in this quarter was largely related to these price increases.

As we work through the significant reductions in the production of virgin refrigerants, we've been managing our inventory, and will continue to do so throughout the remainder of this year, to ensure that we'll be able to meet the needs of those customers who support the recovery and reclamation principles set forth by the EPA, and who will participate in the long-term sustainable reclamation industry.

In order for our industry to provide economic incentives to contractors to support the principles of recovery and reclamation, the business model for participants in the distribution chain is going to have to change. Our market strategy specifically relative to R-22 will continue to evolve through education, economic rewards, and systemic approach towards containing the industry's need, and EPA's goal to smooth transition from the phase-out of R-22, which is the most widely used refrigerant in the US aftermarket.

We will also carry these strategic principles to our European joint venture, and will, in the future, be reaching out to developing nations with similar offerings. We anticipate that our work with UNIDO, the DOE, and other entities around the world, will help us to launch this strategy on a more global basis.

Currently, the retail price of R-22 is 3 to 4 times higher than the pricing during 2011, and we are seeing signs of additional increases in pricing. While there may be different pricing throughout the chain, our discussions -- our discussing the trend is the same across the industry. Whatever your reference point is on price during the first quarter, you should have noted a more than doubling of price when compared to last year.

Based on the current pricing dynamics, we believe that the higher gross margins we realized in the first quarter are sustainable throughout 2012 cooling season. Unless there's a significant and unexpected reversal in the pricing over the course of the year, we will be able to sell product without a significant increase in operating costs. As such, for the remainder of the 2012 cooling season, we expect significantly improved profitability for the Company over 2011.

Please keep in mind that even though R-22 prices increased early in the first quarter, 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 were a blend of a variety of price points. We anticipate that the second-quarter will be more reflective of the full impact of the increased pricing of R-22.

As we've said before, we believe that R-22 price increase is the first and most important step to creating a supportive market environment for the growth of our reclamation business. Higher R-22 pricing creates an economic incentive for contractors to capture and return dirty gas rather than venting it to the atmosphere.

As it becomes more economically attractive for the contractors to capture and return the gas, we believe Hudson will be able to acquire an increased number of pounds that we can then reclaim to person specification, and resell into the marketplace, to fill the supply gap created by the EPA phase-out of R-22. However, reclamation is largely a seasonal activity, which typically begins in late spring and continues through early winter, slightly trailing the cooling season. Therefore, even though R-22 prices significantly increased after the EPA No Action Assurance letters were sent out in January, the reclamation season has not yet begun.

During the last few years, we've enhanced our leadership position in reclamation through the development of our proprietary technology, expansion of our dedicated reclamation facility, and establishment of a robust distribution network -- all in anticipation of the price increases that would make R-22 reclamation attractive. We believe that we are now well-positioned to begin capitalizing on the reclamation opportunities.

In 2011, when R-22 was $4.00 a pound, the entire reclamation market was around $32 million -- pretty small. It has been shown in previous phase-outs that the price of the refrigerant is the driver for reclamation. So, as the price of R-22 increases, we believe that the volume of reclamation will 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 of $28 per pound -- a price that's not unreasonable, based on prices from prior phase-outs -- and utilizing the EPA's forecasted growth in reclamation, the overall reclamation market could grow from $32 million to reach in excess of $800 million of revenues. Based on our market share at such levels, we would expect to see a more than tripling of our revenues.

While we've been focused on reclamation for many years, our customers did not necessarily share our sense of urgency to grow reclamation, since R-22 was relatively inexpensive and the supply was plentiful. During the first quarter, our customers began to recognize that there may soon be a shortage in the virgin supply of R-22, and that the only long-term solution for this supply shortage is the source reclaimed refrigerants.

We've been in close contact with our partners and customers to keep them informed of the details of our reclamation programs, and are encouraged by the inquiries and discussions we're having. We believe that our Platinum Program is the best reclamation program in the industry. The Platinum Program is designed to provide economics for everyone within the distribution chain, and peace of mind that their needed supply is locked in for the next year, should they choose. We believe that the anticipated shortage of virgin R-22, coupled with the higher pricing, will drive sustainable growth for both our revenues and our profitability.

We complement and enhance our product sales by providing our customers with patented and proprietary reclamation, field remediation, and energy services. The services we provide remove the commodity aspect of the product sales, which, in turn, helps us to strengthen our relationship with our customers. Through our service offerings, we have also been able to expand the breadth of our sales, and we recognize the importance of being able to provide the right solution in the right place at the right time to meet our customers' needs and drive revenue and earnings growth.

The industry reacted rapidly to the EPA's No Action Assurance letters, but the longer-term impact on R-22 pricing will not be fully known until the EPA issues a final rule, which we expect later this year, setting R-22 allocations for 2012 to 2014. We believe the most important way to drive sustainable growth for our Company is to work through any supply difficulties with our customers, so that together, we will all be healthier and more profitable in the years to come.

We've worked very hard to prepare our Company for the changing dynamics of the refrigerant marketplace, and we believe that we are well-positioned to capitalize on the opportunity being presented by this dramatic change to our market landscape.

With that, I'll hand it over to Brian to provide our detailed financial results.

Thank you, Kevin. Revenues for the quarter increased 7% to $14.9 million, primarily related to an increase in the average price per pound of certain refrigerants, offset by a slight decrease in the number of pounds of certain refrigerants sold. Refrigerant side service revenues increased primarily due to an increase in the average selling price of jobs completed when compared to the first quarter of 2011.

Gross profit margins increased to 40% for the first quarter of 2012 as compared to 27% in the first quarter of 2011, primarily due to the increased prices of refrigerants. Operating expenses increased slightly during the quarter to $1.8 million compared to $1.7 million in the first quarter of last year, primarily due to an increase in selling expenses.

For the quarter, we reported a net income of $2.5 million or $0.11 per basic and $0.10 per diluted share, compared to net income of $1 million or $0.05 per basic and $0.04 per diluted share in the first quarter of 2011. It should be noted that in the first quarter of 2012, we reported tax expense of $1.5 million, most of which is non-cash due to the availability of our net operating loss carryforward.

Now turning to the balance sheet, beginning last year, our customers' buying behavior returned to a more traditional seasonal pattern. During the first quarter of 2012, many customers were particularly focused on R-22 when compared to most of the other refrigerants in use. We believe 2012 will be more representative of the seasonality within our quarters compared to 2008 and prior years. Correspondingly, our cash flows will reflect more historical patterns, and we will see the cash generated from our sales reinvested back into inventories to support sales growth for future periods.

As of March 31, 2012, the Company had $16.6 million in inventory and working capital of $17.5 million. As we've discussed, due to the seasonality, our business is working capital-intensive. We use our working capital to purchase inventory to grow our revenues in future periods. Many of the businesses and industries operate at extremely high inventory turnover rates and require less working capital to grow.

At Hudson, we build inventories in the latter part of any year, prior to our peak sales season of the first and second quarters. Consequently, we have to strategically manage our inventory levels several quarters in advance of our sales. In order to achieve future growth in revenues and profitability, we expect to utilize more working capital. As we closed the first quarter and exit the pre-cooling season refrigerant sales, our balance sheet reflects the beginning of our seasonal increase in receivables and decrease in inventories.

This seasonality is why we operate with the working capital credit facility, as opposed to most businesses that utilize a cash flow debt structure. By definition, a working capital facility is designed to allow business to borrow money today to invest in liquid assets, and then sell those assets in a future period, to more easily manage the peaks and valleys of cash flow. Consequently, as an investor in this Company, you should expect that, at any given time, we'll carry limited cash in our balance sheet, due to the fact that we've used our cash to lower our debt and our interest expense.

Our cash position is no indicator of Hudson's cash availability under our credit line. As of March 31, 2012, our cash balance was $148,000. Our available cash was nearly $9 million and our interest expense was below last year. We are satisfied with our current working capital levels. As we move through the year, we'll be generating a significant amount of cash, which we'll be able to reinvest in inventory for next year's growth.

Obviously, we do not need additional working capital for 2012, but we're in the process of expanding our working capital credit facility that will help support our growth for 2013 and beyond. We are currently working with our lender and others to enhance our facility. It is our expectation that prior to the expiration 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.

This is a very exciting time for our Company. We've been carefully planning and preparing for this industry shift for many years, and believe we are well-positioned to add customers, and to drive revenues and earnings growth by capitalizing on our ability to provide the right solutions for our customers. We have realized the first important step for through the recent R-22 price increases, which enhances our overall growth strategy, and will drive the growth of our reclamation business by making the reclamation of dirty gas the only viable solution to fill the anticipated 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. As I'm sure you noticed, our presentation today focused almost exclusively on R-22, because it has had such a significant impact on the industry and on our business, and will be a major factor going forward. We will, of course, be happy to discuss any other aspects of our business and of the industry, and we'll address whatever questions you may have.

Operator, we'll now open the call for questions.

(Operator Instructions). Greg Garner, Singular Research.

Thank you for taking my questions and congratulations on a wonderful quarter, gentlemen. A question, first of all, about the gross margin. I was under the impression that it would probably range in the 20% to 30% range, and here it's higher than that. So, should I look at that as because this -- because the inventory that was sold was purchased in fourth quarter at much lower pricing levels for R-22? Is that what's driving the high gross margin, and consequently it may not be that high going forward?

You're correct. What's driving -- historically, our margins have been in that 20% to 30% range. Let's say it goes to about 20% in periods of time where we're seeing sale price decreases, but it certainly can go higher. And we certainly benefit with any price increases in our margin, due to the fact that we're typically buying inventory in advance of a sales season.

But back to this pricing dynamic and margins, we certainly are beginning to see the benefit because of the higher prices; but, going forward, we're anticipating our margins to be higher than 30%, because ultimately, what will happen is we'll get more used gas or dirty gas in. We'll reclaim that gas and we'll resell it. And the margins on those refrigerant sales are much higher than the traditional margins on product sales when we're purchasing virgin gas, let's say.

So we do think that you're seeing the benefit now in margins because of increases in prices, but you also should see improvement in margins in the future, because the mix of our revenues are going to change. And we're going to see more reclaimed product being sold in the future.

Okay. And so is it safe to assume that inventories were really -- the current inventories right now, at the end of the first quarter, were all in place the end of the fourth quarter? Or were there some purchased also during the first quarter?

We buy product in each and every quarter, but we're generally buying in advance of the season. And generally, we're buying more product in the third and fourth quarter than we are, let's say, in the first and second quarter.

Okay. And can you tell us what the current wholesale price is on R-22?

It's probably, generally speaking, above $10.00 a pound. And we think that price is going to increase as we get through the season. But at some level, once you get further down the chain, it could be all over the place. And some places, we've seen quadrupling the price. So, it's really for when we talk about price, we'd rather have you just simply focus on the trending. And the trending certainly has been a doubling and a tripling already, but we are expecting to see more price increases.

Are you seeing anything on the inventory -- I guess I'm asking what -- a better way of phrasing it is, what are you seeing on the industry inventory, as far as since volumes were slightly down a little bit, are you -- your visibility into what inventory might be at the manufacturer's site or at competitive distributors, is there anything to lead you to believe that there's more inventory in the channels throughout the industry or less? Any commentary on that?

Probably at this point in time, we think inventory levels are, let's say, normal. We don't think there's any excess inventory necessarily down the chain. We don't know necessarily that they're not carrying similar amounts as they might have in the past. We've had a lot of ups and downs over the last couple of years, but things seem to be becoming more normalized, beginning last year into this year.

Just to add to that point is, in previous years, there was a glut of refrigerant, which was clear it was driving the price down. So, on your previous point, yes, the margins were lower than what we normally would expect. So the last couple of years, we've been compressed on margins because the price was declining, which was odd in the first place. So now we've gone the other way on one end.

When you come to volumes of industry -- volumes of refrigerant in the industry, we may not be clear on exactly where they are right now. But what we're getting is a dynamic when we're selling, when there was a glut the last couple of years, you had to work in sales -- meaning, the price was coming down. There was plenty of gas. There was plenty of people bidding on a job. And that was compressing the margin that made it more difficult; the sale price went down.

What you're seeing now is, it's not about, could we sell our entire inventory for the year in a quarter? Probably. Meaning it's there for the sales. There's no work there. The prices come up because of that. It's really trying to manage your inventory, not sell.

So in the past, where you were saying you're selling and you're selling and you're selling, here is about managing your inventory because you don't want to run out of certain things, because you want to keep your customers happy; you want to put programs in place to drive reclamation in the future.

So, yes we can rip out a lot of refrigerant right now in R-22 very easily. We don't want to do that. We want to go up to the customers that are going to drive profitability for our Company. And that -- the customers are going to bring services, more dirty gas. So it could be very easy for our sales guys if we let them loose to sell our R-22, which we hadn't seen in years. Do we want to do that? We absolutely won't do that.

Okay. Well, I'm glad to hear that, but it also appears as if the industry is also having some discipline along these same lines, such that there is not any one participant trying to just take advantage as much as they can, because they have some excess inventory -- say, a manufacturer even. So that's what it sort of sounds like from what you have to say, since there wasn't any disruptions in the inventory within the industry as you see it.

Well, again, disruptions -- we're certainly not in the season yet, okay, so we just saw -- right now as soon as it gets hot and then you're going to see your second flow of gas. So what you see is pre-season in the first quarter.

People don't necessarily need the gas yet and they're starting to load their shelves, even at these higher costs, because they know they need it; they know it's not as easy to get the R-22. So what is the big driver? Is the driver the price on the gas? Or is it the availability? Hard to say. It seems that people are starting to line up for reclamation programs because they're worried about the availability.

And so, it's very hard to say what's going to happen in the second quarter. It sure looks like one thing is going to happen. And by the line of people thinking the price is coming up, we've seen price increases recently on R-22. Will they take hold? It sure looks like it. We'll see what happens when it gets hot, because that's when it starts to go. People rip through the inventory that they purchased pre-season, and then they start selling it. They just have to reload their shelves again.

So you'll get your second wave. That's when the -- if there was a tightness in the industry on actual availability, that's when you'd see it the most. So that's where we're at right now. So we haven't seen that. What we're seeing is everyone is expecting it and that's why the price keeps creeping up.

Okay. And the second quarter is when you're going to start to see the more reclamation activity, to see how that works through in managing the inventory also?

Yes, and again, we'll buy a case -- we'll buy our inventory for 2012 and 2011. And we'll end the year and that's fine. And we like the fact we're getting price increases and we're increasing the margin. That's all very good and we believe it will roll into next year.

Because we believe two things are going to happen. Price increases -- we haven't seen this in previous phase-outs, so you've got a year of price increases. Once it starts, it usually continues. And that's why things like R-12, we saw go up to the high 20s, close to 30. You're seeing in Europe the same thing at 30. It's the same -- once it starts to ramp, it usually starts to ramp. We've seen this.

Now we're expecting that to happen and that's all good. But for us, the big -- I think the thing inside that excites us the most, not just that we have significant margin for the rest of this year; it's not just that we believe that's going to go on for next year and the next in the price increases. It's that we believe we've positioned ourselves as the largest reclaimer in the country. We believe we've positioned ourselves with the best infrastructure. That's the gas we make the most margin on, and we believe this price increase is going to allow us to start that influx of our large volume gas.

Okay. Thank you very much. I'll get back in the queue. It looks like Hudson is very well-positioned to benefit from these dynamics that are moving in your direction. Thank you.

Steve Denault, Northland Capital Markets.

Just wanted to follow-up on the last gentleman's question. So you guys are in a great sweet spot. You're sitting on a lot of R-22 inventory. You did a depletion rate was 7.5% in the quarter versus kind of where you were at the end of the year, which is below historical averages. Yet we've had warm weather, immense demand for R-22 because everybody believes the price is going to continue to go up. How should we think about that depletion rate and -- into the second quarter?

The percentages may vary slightly. Again, it's really -- there's been no change to our overall strategy. And our overall strategy continues to be to buy refrigerants in advance of the sales season. So, we're comfortable and confident that our historical strategy, if you will, was prudent and appropriate for this coming year as well.

Again, we're expecting to see continued increases in the sales price of R-22. We're expecting to see sustained higher margins and so forth. But really, again, as Kevin said before, what we want to absolutely make sure of is that we're continuing working with our customers to encourage them to get into the reclamation game. We've enhanced some of our reclamation programs as a result of it. We've spent a lot of time over the last three months with those customers and so forth. And we're really excited about the success we're expecting to see from reclamation.

So should we expect to see a higher depletion rate into the second quarter just because of the nature of seasonality?

Percentages are going to be deceiving because the fact that you don't -- what you won't be factoring in and won't be able to figure out are how are price increases going to affect the ability to re-buy inventory? So I wouldn't rely on percentages. I would rely on, again, what our strategy is. And as we said, our strategy hasn't changed and probably won't be changing.

Right. So this is a follow-up to that. As you've got an EPA final ruling that comes down and is it June timeframe?

It's like impossible to predict.

We hear all over the board. We keep pushing the same thing. We hear it's going to be June or after. And what does June or after mean? Is it December? We don't know. But that's the hard part. We can't get a real feel, with even our contacts down in Washington, of really when to count on that happening. But either way you look at it, it will pretty much be at the end of the season. So this season's pricing will be on what we know already, not on what the EPA puts out.

So how do you balance that regulatory risk, even though they've kind of stated initially here that this is what we'd like to see in terms of production curtailment? What if there's public outcry and all of a sudden they reverse something like that. How do you balance that risk with the fact that you're sitting on inventory that's got an immense amount of value today, and you've got an inability to kind of hit that bid, but -- so how do you balance that with the fact that you've got -- you still have regulatory risk out there?

Well, first of all, the inventory that we have -- we have a certain amount of inventory is a good amount of inventory that will take us through the cooling season. So we don't believe we're going to hear something from the EPA before the cooling season ends. So, for one, we don't see the heavy risk this year in 2012.

When we're reloading for next year, there's two ways we're reloading. First of all, we have this belief that this increase in price is going to allow us to get a significant quantity of dirty R-22, for a better word, contaminated R-22. That's what we're driving for. So we're hoping that our inventory going into next year is significantly heavy in reclaimed R-22, which, really, we don't see the risk in that. Actually, the margins on that are significantly higher.

So, for one, that's what we're hoping to do. When we -- if at that point the only risk you have is if you load it up on inventory and prices went down for some reason in 2013, well, again, we believe we're going to know where we're at before that condition happens, meaning we're not going to load heavy on inventory early in the year anyway for next year. The only loading of inventory that we would possibly do this year in advance of 2013 in any kind of meaningful way, hopefully, is purchasing dirty gas. And that, we don't see any risk in.

And so that's really what our goal is, to try to get the lowest cost inventory we could possibly have before entering 2013. So, when the rule does come out later this year, what the effect is, well, it depends on how late it came out. If it came out in December, it's possible we had loaded up on some inventory for 2013. That if it came out -- we don't see a crazy change coming out personally, just to tell you too, first of all, that the EPA is just going to reverse this whole thing and prices are going to crash down. We don't believe that's going to happen, I'll tell you right now. But also we don't see the big risk from when we will load up for 2013.

Did you guys hold back at all in terms of with first quarter volumes being down, and the fact that we've had a warm start to spring season, did you guys hold back at all just anticipating higher prices?

Well, I don't know if the expression would be hold back. I mean, certainly, we've said words like we're conservative. We've said words like that we're making sure that we're working with customers who value the reclamation proposition and the transition from virgin to reclaimed gas. Those are the important principles.

Not everybody out there in the marketplace certainly sees it the way we do. People have been used to for 15 or 20 years of plentiful virgin gas, and reclamation is an annoyance or being part of the chain. But those people will sooner or later have a reckoning that their business model and their approach to the market doesn't make sense.

So, I mean, the other day, when we talk about volumes, we used the word slight. We didn't say the word significant or material or whatever. So at the end of the day, I don't think there's much really to be focused on, on the difference in the volumes, since it was a slight change. But if you look at going to this market, the difference of this year, okay, previous years, depending on how much cash you had, you could buy whatever quantity of R-22 you wanted.

Okay. So the fact of the matter was you could buy what you want, you could sell what you want, at the right price possibly. So, the dynamic is different this year. The fact of the matter is, we're not a commodity sale. That's not how we sell. We don't say we have this inventory, we can make it an incredible gross margin the rest of this year. Let's just dump it out. No, our whole business is about future revenue. Our whole business is about -- we have gold sitting in our hands right here. How do we make the most of it?

So you take your best customers. You take the customers with the best potential and you don't say we're going to sell to this guy. We don't have to; I can sell it to anybody right now with R-22. I want something for that. Not just what we make on margin. And so what does the future look like? Can I get a reclamation program? Can we bundle this thing? Can we bundle it with some energy services? Can we bundle it with some of our other programs? Because we've got the gold in one hand, and we want to get these services going that aren't -- haven't gone yet.

So reclamation really had not gone yet. We want something to drive this. So guaranteeing a certain customer, hey, I'll guarantee you a volume of refrigerant if you jump on this thing and you give us a certain volume of dirty gas. Those kind of programs we were never ever able to do before because of the value wasn't there on R-22 for someone to say, okay, I'm willing to sign into this thing; I get this thing now because I do want that guaranteed supply.

Well, you're not going to guarantee someone's supply if you don't have it guaranteed, because you used it as a commodity and sold it all. So for us, it's about managing inventory. It's about getting the best programs for future growth. Yes, we're real happy with how we started this year and how our inventory looks, to help us drive what's going to be the future for inventory growth.

So all the inventory growth in future years, the significant growth, will be reclamation. And we believe that. And we believe the volume of gas we have even in 2012 is clearly going to help us drive that. And we're using that to get these programs to the biggest companies in the country. So yes, we're quite excited with that, even with the volume? Yes, we're managing our volume, put it that way.

Perfect. Thanks.

Craig Hoagland, Anderson Hoagland and Company.

Could you just give us a flavor for the conversations you've had with distributors or contractors about how they're adapting to the changes in the marketplace?

Probably more of our conversations are with distributor wholesalers. And the kinds of things that we're -- and the people, probably more importantly, that we're speaking to now, are different. We're speaking to the owners, the principals of these businesses. Where, in the past, reclamation wasn't that important and you wouldn't get their attention.

Certainly, buyers are now, of these organizations, are becoming aware that there are limitations on what they can purchase. And so, the kinds of conversations we're having are an extension of our existing Platinum Program. Again, the idea that you participate in reclamation; you participate in providing dirty gas back to Hudson. That provides you with the opportunity, if you choose, to have supply in future periods.

And so the conversation is along those lines. But the interest level, I think, is higher. And there's more attention being paid to these conversations than there might have been, let's say, 2011 or prior.

And do you have -- can you give us some idea of -- have you had more distributors or wholesalers sign up for the Platinum Program? Are those numbers improving?

I think it's a two-fold growth. One is we have had more, yes. But also, I think the ones that we already had are becoming more serious about it as well. So the foundation that we've built over the last three or four years has the ability to lever, because there wasn't significant reclamation coming in.

Now it's not just about adding more customers. It's now about levering the growth of the existing customer base. And we do expect to add more customers, which is fundamental towards that earlier conversations we would have had with our investors, is that we were confident about our ability to grow our revenues at double-digit rates, because we know there's still a lot of people out there that don't have reclamation programs. And obviously, now they're going to have to get even more serious about it.

It's funny. When we look at the marketplace on the wholesale locations, we had gone down this path really since the beginning of this Company, because we felt that was the right channel to bring gas back. So we wanted to work through distributors. We don't go directly to contractors, small contractors. We work through them.

So we built a company for that, so that one day, when R-22, actually dirty gas, was valuable, it would come back to those channels. And we'd be the guy because we had long-term relationships with them. So adding new customers is important and that's good.

If we did nothing more than just get actual volume from the massive infrastructure that we have, the number of wholesalers that are in our programs, it would be enormous. So, for us the big thing -- so, yes, it's about adding more and we are; but it's really about our existing customers actually returning a lot more gas than they would. And we knew the driver for that was if they could stop charging the contractor, and they could put an economic incentive base, that you can get to the point where it works, where they won't vent the gas. They're getting paid for the gas. So, rather than getting paid, [they] charged $100 a cylinder to bring dirty gas in. Again, punitive. Dumping to the sky.

That's what we saw -- tell the EPA every single year. So the big driver was price comes up high enough, we can pay more for the dirty gas, they can pay more for the dirty gas and we'll get more back. So the biggest thing I think we see so far early in the season now, is that just tons and tons of distributors have changed their attitude because they're worried about supply. And the guys who were charging, an enormous amount of them stopped charging and some are paying. That's the first step we saw.

So, that's really the biggest thing to us is about, yes, we want to add more distributors; but we have an enormous infrastructure of distributors. We really do. We're the largest in the country when it comes to that. And if we could just get a lot more gas from our existing customers -- which we believe is exactly where most of their product is going to come from, is our existing customers -- once they start paying for this gas, we think the incentive is there now to do that. We see their mindset change. That's the thing we're probably most excited about.

So you have had customers discuss with you their plans and how they're changing their end of the reclamation?

Not only that, but we're modeling plans together. So we're figuring out ways to help each other to make their plan just a step above anyone. So things have come up and come to light in the last couple of months that have been significant. We've been rolling out different things than we had in other years, trying it out with certain very large guys to see how the market responds to that.

We're pretty excited about it. Never would've gotten that response a year ago. So that's the main thing we see. It's not that we're not excited about getting a lot more customers, because we are; but it's the response of our existing very large customers and what they're trying to do to drive this. And is it price? Not necessarily that to a point, but it's mainly because of availability. And they want to get that gas because they know there's going to be a shortage.

Right. Okay, thanks.

[Joseph Delahausse], MindShare Capital.

Very nice quarter. A couple of questions here for you. You mentioned that the wholesale pricing is about $10.00 per pound for R-22 right now. Is that right?

It should be more than that, yes.

Okay, okay. That's what I wanted to follow up on because I thought earlier in your prepared remarks, you had said that the wholesale pricing was about 3 to 4 times what it was last year, which was about $4 a pound. And so I didn't know if it was, we're looking at $12 to $16 a pound or more of the $10 per pound? Or if there is a difference between the retail and the wholesale price?

Pricing could fluctuate on a daily basis. Pricing could fluctuate one region versus another or one store from another. Ultimately, what we will try to focus on is not the specific dollar but the trending. You know, are we seeing doubling or tripling of the price? Absolutely. In some places, you might see the quadrupling of price. But at the end of the day, we're generally focusing on, let's say, the lower end of what the price increases are. But we're still in the beginnings of what we expect to be price increases. We've just seen price increases. We expect it to continue.

Yes. Okay. And could you remind me what your current capacity is for the reclamation of R-22 gas? Like in terms of millions of pounds -- or pounds per year sort of --?

With regards to capacity, first off, we run our facility on one shift. So we certainly have expressed that we could run two shifts. We also built in, in '09, excess capacity that we really haven't utilized. And we did that back in '09 because we did anticipate what's beginning to happen this year, might have happened back in 2010. And we want to be prepared for that.

So we've already spent a lot of capital -- probably in the aggregate, we spent over $10 million in reclamation and capacity. And at this point, generally speaking, we don't add a lot more capital dollars, because we have such a massive infrastructure to lever off of. Most of the capital we add now in the tune of hundreds of thousands, say, $300,000, $400,000, $500,000, $600,000 annually is supporting the additional cylinders coming into our facilities and so forth.

Yes. So last year, you did maybe 2 million pounds of R-22 reclamation back, something like that? Is kind of what I backed into, based on the last conference call and from the numbers you threw out there. Is that about right?

That's about right, yes.

Okay. So, I mean, can you do 15 million, 20 million pounds without really any major CapEx expenditures?

Well, I doubt we could have a full growth without some capital expenditures. I mean, at the end of the day, we're not giving specific details for competitive reasons, obviously, about our capacity, but you certainly know if the EPA is expecting a three or four-fold growth in reclamation, we've already built in a significant amount of excess capacity.

Certainly, we could run a second shift. Certainly, we added a whole bunch of capacity in '09 that we haven't really utilized because there was no growth. So the last thing we want to do is not be prepared for the growth. We certainly have been planning well in advance and spending money well in advance of any growth opportunities we might see in reclamation.

Okay. I guess, do you have an estimate or a ballpark figure of how much you expect to use of your plant this summer? You know how much of your capacity going from say 2 million? I know the EPA has said 3 to 4 times increase in the amount of reclaimed gas and this year versus last year is what I think they are on record for. Are you sort of forecasting a similar sort of percent growth?

Well, in the past, we've talked about this relative to the three or four-fold growth in reclamation. We don't think it's going to happen in one season. Now it's probably going to happen in two seasons, but it's not going to happen like full stop, throw the switch immediately.

Ultimately, part of why that there was significant supply in the past preceding this year is stockpiles. So we're still going to work through the stockpile this year, so we wouldn't necessarily expect a three or four-fold growth immediately this year. So ultimately, either way, we're always trying to prepare in advance of any reclamation season for the anticipated growth we're expecting. And we would have done that already.

Okay. And you know your current market share is around 20% and you're making strides with wholesalers to increase that market share. Can we realistically down the line see 30% or 40% market share, given your average, given your headstart, your commitment to the recycling programs and the Platinum Program? Is that attainable, do you think?

Well, we'll tell you this. We wouldn't be shocked with that number. Again, will we bank on that number? No, we won't be shocked with that number. And the reason we won't be, and we expect, certainly, to increase our market share, is because the area of the market where we believe almost all of the venting is taking place is in the residential light commercial area.

So in that area -- so we worked on the big large facilities, let's say that's 30% of the market or 25% of the market. And we're heavy there because we have the equipment and we go into the field. So we work with these big large contractors on the job sites. And we have a very good "in" there. We don't believe most of the venting takes place there. We think it's all residential light commercial.

So, if the growth comes from there, what's the logical channel -- that's the logical channel to get through the distributors where they bought the gas from, where they bought all of their parts and pieces for the air conditioning system. So we did a target effort on purpose to lock up as money and work with as many, and more of a partnership arrangement with distributors all over the country. So if we're correct and EPA is correct, and this volume of gas starts coming back, where is the logical channel? To us, it's through these distributors. And that should be our markets.

So, at this point, we're 20% because there's not a lot of volume that comes from that end, because most is vented. Once it stops being vented, it should come through that channel. And clearly, we would be the recipient of that gas. So, we do believe there's a logic there as to why we should have a significant growth in market share.

Okay. And last question and maybe I'll jump back in queue. Back to the gross margin issue, we did 40% gross margins in this quarter and really haven't seen much impact on your R-22 reclamations plan. And I know you guys scaled up the facility to be profitable at a much lower price than the current prices. Is it fair to say that gross margin on any R-22 reclaims is maybe 70%, 80%?

We don't break out -- again, for competitive reasons, we don't break out the distinctions between the different types of refrigerants, the virgin versus reclaimed. But generally speaking, when we're reselling refrigerants, our margins are a lot lower in any distribution business. The people who produce the product typically try to control everyone's margins in the chain. So yes, our margins are higher on reclaimed gas versus virgin gas.

Ultimately, the words we've said thus far is that we are expecting to see improved margins above the historical levels, which we'll say we were in that 30% range. Ultimately, as we get through this season, and better understand the mix and the amount of reclamation that we'll be able to acquire, we'll probably be a little more specific about margins. Because then it will be a little bit easier to predict as opposed to guess. Because we'll start to see exactly how many pounds are coming back, and how much market share we're picking up relative to the overall reclamation market.

Okay. Do you think then that the 40% we saw in the first quarter would be the exception? Could even be the low for the year?

It's possible. I mean, certainly, in this first quarter, we've worked through some amount of price increases, which we don't reap the benefit throughout the entire quarter because of the way product is sold, and commitments are made and the like. But certainly, we're seeing already some additional price increases. There is the possibilities of improved margins from here, yes.

Absolutely, our margins were better in March than they were in January, put it that way. So -- and that's continuing.

Okay. Very good to hear. Thanks, guys.

(Operator Instructions). Anthony Stoss, Craig-Hallum.

Just on the June quarter, so last year at this time, you sold roughly 25% of your inventory sequentially March into June. Given prices are better this year, can we expect as shareholders to see you sell 25% or more kind of sequentially into June? And secondly, overall in the year, given your current inventory balance, I mean, how should we think of inventory turns for the full year on what you have in stock right now? Thanks.

In any given year, our inventory turns are, let's say, probably never above a 2 -- is it 1.2, 1.4, somewhere in that kind of range. And again, there's nothing about this particular year that's going to be different than any other year.

You know, again, what is going to be difficult to track is your calculations based on percentages. Because again, what will happen for sure is, we will begin to reload refrigerant at higher prices than they would have in the past. And that's going to sort of distort any mathematical calculation you might make.

At the end of the day, we expect to sell similar volumes or greater volumes than we would have in the past. And we are expecting that we will do it in some sort of normal seasonal pattern. What goofy, crazy things could happen, we don't see anything that would change that or cause us to think differently. So we would expect this year to be pretty much similar and certainly obviously better than prior years.

On the June quarter, I guess what the tone of quite a few of these questions are, can we expect you guys to at least start to sell? And if it's on a seasonal basis of last year, you sold 25% of your inventory, will you commit to shareholders that you guys will sell 25% of your current inventories in the June quarter, since it's seasonally the strongest? I think the fear is, you guys are sitting back waiting for $25 a pound, when the EPA could change something and the $10 number might start to come down.

Well, first of all, we're not waiting for the price to increase. We're looking at using this gas as a resource to drive more customers to us, more pounds to us. It's our main focus to use this gas for its value. It's not about saying I think it's going to come up, let's sit back. It has nothing to do with it. We don't do that at all right now.

Because it is uncertain and we've been in this game a long time. We're not going to sit there and take a chance on something like that. I mean, something could happen. We don't see what would happen right now, but you never know. There's no part of -- we're running our business and we're using it to grow this business. It's nothing to do about, hey, let's hold back; we think it's coming up; and then all of a sudden, it comes back.

Because we've seen that happen in previous years -- not when this dynamic has happened. We've seen it happen on refrigerant pricing. Not that we were sitting back, but we were lucky and we're happy we sold when we did, because it did dump. We don't see it coming this year, but we would never put ourselves in that position. And that's clearly not how we're running it.

Yes, and we don't speculate on inventory. Again, our inventory turns will look just like they have in the past. So we're not going to change our methodology or whatever. It's just that if you're looking for percentages, it will be distorted because of the different price points that the product is going out.

Okay, thank you.

(Operator Instructions). Joseph Delahausse.

I wanted to find out how -- kind of the focus on the US market and what the EPA is doing. I know you're making some efforts in Europe. Can you just maybe hammer home for me some of the programs in place, maybe the timing, how far behind Europe seems to be? How big the market -- potential market could be in Europe with some of R-22 reclamation issues?

Europe just as a market, let's just say, is something equivalent to, let's say, 40% of the United States. The R-22 opportunity in Europe is smaller, though, as a ratio than the United States, where the United States is about -- R-22 is more than 60%, 65% of the market. In Europe, it's probably under 50%.

But overall, there's a huge opportunity, because in Europe right now, there is no virgin production. So it's -- virgin production is completely phased out. The aftermarket has to be served with reclaimed gas 100%. Eventually United States will get there. We just don't know when. Right now the rules on the books would say that the virgin production will continue to taper down and eventually get to zero by the end of 2019.

The second part, though, possibly more important about Europe is, Europe is operating in a mandatory cap and trade system. Generally speaking, the number one user of energy is the refrigeration systems in office buildings and other settings. This is not number one, then maybe it's number two next to lighting. And generally, these refrigeration systems are very inefficient.

So, where we are really expecting additional growth and opportunity for us is the development of our energy optimization services. And that probably is in a way more exciting, even though we're very excited about the R-22 opportunity in Europe. But we're certainly excited about the energy optimization and the potential growth for energy services in Europe.

Okay. If R-22 isn't in -- virgin R-22 isn't being produced in Europe, is that a recent mandate that they may have? I'm just wondering where they're getting their current supplies of R-22 for field services and whatnot?

The current R-22 would be served by either stockpile or by reclaimed refrigerant. Gas coming out of systems that are being changed out. That's being harvested and reclaimed, and then resold back into the marketplace to service the remaining systems.

Is there a big competitor who has the overwhelming market share of that service now? Because it seems like -- I mean, obviously, you don't have a facility there, so maybe that's been somewhat of a logistic issue. But I'm just wondering who's providing the reclamation services over there?

It's really fragmented and it's almost on a country-by-country basis over there. There hasn't been the development of a reclamation industry as there has been here in the United States. We started reclamation before the Clean Air Act Amendments in early '90s and, certainly, have been developing that. Europe really only started reclamation probably about three or four years ago, of any size. And it's really disjointed -- that may not be fair, but fragmented, certainly, and different capacities and capabilities by a country-by-country basis.

But in addition to that, entering the market, we're not entering the market in Europe as just a reclamation center where you set up saying get us dirty gas and we'll start cleaning. We have an advantage there. Our partners that we're working with there in our joint venture have access to certain amount of gas that we have the technology to separate. It's not just great distillation.

And so what our technology over there to make gas that would be unusable as a refrigerant any more, usable. So where you would have had to destroy the gas, we're making that gas pure and we're able to resell it to the gas. So where others in the industry out there wouldn't have the technology to take that gas and bring it to market, we're really -- we're going to be bringing it to market this year and for future years here, with very high gross profit margins on it.

You're taking a very low value gas that may have been destroyed, bringing it and selling it at very high numbers. So that's what's entering us in. We want to clean every refrigerant, not just that refrigerant. But as Brian said earlier, we really want to roll through the energy optimization.

And we're getting -- we're surprised at how fast that -- the possible jobs are lining up for us to at least start playing as far as getting the right people involved from Hudson here, training people over there for -- we didn't expect the energy optimization to jump on it and be as excited as they were, as fast as they did.

So, that gives a little bit -- a little -- surprised us a little. We're happy it did that, but we were focused on making sure our technology was there to make this gas that's in the industry ready to be sold. So yes, we basically are jumping in reclamation -- let's put it another way. We're jumping in reclamation with a running start. And we're clearly start jumping into the energy optimization with a running start. So that's why we're excited about Europe.

Would you anticipate seeing some 2012 revenues from the energy optimization and commercializations, if you will?

Well, in the energy optimization, we're definitely already going to be starting projects there, so we would see some. Would it be significant? Probably not in 2012 by energy. But definitely we'll be doing some. So that's the first sign for us.

And basically, it's such a new thing for them, they're excited about what it will deliver; but again, the first thing is doing some jobs, show them that none of that stuff happens overnight. They're lining up very quickly for this, if it's true. So once you start this, we think in 2013, we'll be rolling pretty well with the energy in it.

Okay. Okay, great. Thank you.

It appears we have no further questions at this time. I would now like to turn the floor back to management for closing comments.

Okay. I'd just like to thank everyone, and thank our employees for their continued support of our growth plans and our longtime shareholders who have shared our vision. Thanks to everyone for participating in this morning's call. We look forward to speaking to you after the close of the second quarter. Thank you.

This concludes today's teleconference. You may now disconnect your lines at this time and thank you for your participation.