Hudson Technologies Inc (HDSN) 2012 Q2 法說會逐字稿

Greetings, and welcome to the Hudson Technologies second-quarter 2012 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, Jennifer Belodeau, Institutional Marketing Services for Hudson Technologies. Thank you, Ms. Belodeau; you may begin.

Good morning, and welcome to our conference call to discuss Hudson Technologies's financial results for the 2012 second 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.

I'll take a moment now 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 markets for refrigerants, including for 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; and 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 useful life of its 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'll turn the call over to Kevin. Go ahead, Kevin.

Good morning, and thank you, everyone, for joining us today. We're very pleased to report the second-quarter results, which continued the strong results from our first quarter and which reflect another quarter of record revenues and net income, gross margins of 46%, and $0.20 earnings per diluted share. It's gratifying for us to be able to achieve these results, particularly for those of you who've remained supportive of our Company.

Perhaps the single most important event of our industry is the EPA's management of the phase down and ultimate phaseout of virgin production of HCFCs, specifically R-22 refrigerant. In recent months, a lot of focus has been given to the R-22 price increases that have followed immediately after the EPA issued no-action assurance letters in January to producers and importers of R-22 that, until the EPA's issuance of a final rule, limits the amount of R-22 that can be manufactured or imported in 2012 to approximately 55% from the amount allowed in 2011.

While those price increases certainly have a favorable impact on our business and make reclamation economically more attractive, the expansion of our customer base and implementation of our long-term strategies for reclamation and refrigerants have greatly contributed to our strong performance this quarter and this year.

The recent R-22 price increase is an important first step in stimulating and supporting the growth of reclamation, and for the first time, it provides the network of wholesalers and contractors with the needed economic incentive to recover used or dirty gas. As we planned during the second quarter, we continued to expand our base of wholesalers for our platinum reclamation program, and we saw a promising increase in the amount of dirty gas returned to Hudson for reclamation. Our platinum program, which we believe is the best reclamation program in the industry, was designed to provide attractive economics for everyone within the distribution chain and peace of mind that their needed supply is secure for the next year, should they choose.

Even more encouraging is that during the quarter we began to see for the first time a number of distributors offer to pay contractors a modest amount for their dirty gas, which, as expected, resulted in more dirty gas coming back through those partners. We continue to receive inquiries and are having many discussions about reclamation with our customers. All of these trends are encouraging and evidence of a greater awareness in the industry as to the value of used refrigerant and reclamation.

We recognize, however, that we are at very early stages for growth in recycling and reclamation. Predicting when the industry will truly begin to fully embrace recycling reclamation and achieve the EPA's established goals has proven to be difficult.

It's important to understand that the growth of the reclamation industry is more reliant on true supply/demand imbalances than on pricing alone. Although R-22 pricing has increased, we're not seeing visible signs of a supply shortage. There are those in our industry that believe the EPA may add more pounds of virgin production and therefore are not concerned about a shortage in the near term for our industry. These market indications are not necessarily a reflection on demand, which from our perspective has remained strong all year, but may simply be the result of drawing down of stockpiles.

We believe that in order to change the behavior and sustained increases in reclamation, price increases must be perceived as being either prolonged or permanent due to the supply issues. Thus despite the increased price of R-22 this year, there needs to be certainty in the industry as to the future of virgin supplies and recognition that there will be shortages, absent reclamation. These principles are necessary in order to sustain the long-term growth in reclamation.

The industry is anxiously waiting for the EPA to issue a final rule that will establish clear limits on R-22 production through 2014. For the final EPA rule setting the production limits and further phase down for R-22 through 2014, we know that there will be a supply imbalance. Until there is a final rule, we believe there will continue to be uncertainty in the marketplace around what the actual virgin R-22 supply levels might be.

The lack of certainty on future versions supplied coupled with the use of stockpiles is resulting in a mixed bag of behavior in the industry. Some people believe there's plenty of R-22 now, and that the EPA in its final rule may possibly ease limitations on the number of pounds to be produced in future years. Others are looking at proactive approaches that deal with the long-term certainty that R-22 virgin production is going away. We believe that most people, however, are simply not sure what the PDA will do, and they will delay their business decisions until the EPA provides certainty on a final rule.

We know the EPA is committed to reducing virgin production with the goal of recycled and reclaimed R-22 filling the supply gap, and eventually serving 100% of the aftermarket demand once R-22 virgin production is prohibited. As the EPA phaseout of the R-22 production proceeds and virgin supply decreases, we believe that the strategic actions taken by Hudson over the years will give us opportunities to acquire an increased number of pounds of refrigerant that we can reclaim and return to virgin specifications and then resell in the marketplace.

While we can't predict with certainty when the EPA's final rule will be issued, we know that the EPA rulemaking process is ongoing. It should be noted that without a final rule before January 1, 2013, no producer or importer can introduce new virgin R-22 into commerce. Therefore, if we go into 2013 without a final rule, we'll be in the same circumstance that we found ourselves entering 2012.

Now back to the details of the quarter. The revenue increase we achieved in the quarter was primarily related to the increased selling price for R-22. While volumes of R-22 remain fairly consistent, we have seen an overall reduction in the total pounds of HFC refrigerants sold this season, such as 134-A and 410-A.

Unlike R-22, HFC refrigerants have no production or import restrictions and as a result, we have seen price decreases due to excess production capacity and supplies, primarily the result of imports from Asia.

We believe that as global demand for HFC refrigerants grows, so may the capacity to produce these gases; as a result, we may see some difficulties in the near term due to these supply influences. Overall, however, HFCs don't represent a majority of the HVAC market and are not expected to for quite some time.

We're seeing many governments, including the United States, beginning to show support or a phase down of HFC production and for the creation of an allocation system similar to the system currently in place for R-22 in the US. Whether such a system will be adopted, and if so, when, is difficult to predict, but we do know that Europe is banning certain HFC automotive applications in 2013. We've been and will continue to monitor the situation closely.

The establishment of our joint venture, Hudson Technologies Europe for the development of reclamation, remediation, and energy optimization services throughout most of Europe, the Middle East, and North Africa continues to progress. We have moved through the installation phases and we continue to expand our marketing efforts.

We're evaluating how much of this year's activities will go into inventory versus revenue generation, and it's now likely we will look to start up the 2013 year with a healthy level of inventory rather than promoting sales in the latter part of the 2012 season. We believe that this joint venture also positions us well to capitalize on service and efficiency opportunities created by the regulatory environment and high energy prices in Europe, and in emerging markets, where the use of refrigeration and cooling systems is increasing. We anticipate that our work with UNIDO, the DOE, and other entities around the world will help us launch this strategy on a more global basis.

We're continuing efforts here in the US to expand our energy services business as well, and we're pursuing opportunities for organic growth and potential alliances. I'd like to reiterate that the long-term reclaim opportunity is attractive and a significant element of our overall long-term growth strategy. Further, our business is not just about refrigerant prices.

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 help 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 been able to grow and expand the breadth of our product sales. We are hopeful that by the time we exit this calendar year, we will see a final rule published by the EPA, which should eliminate much of the uncertainty in the industry and provide more clarity on the supply side.

We're pleased with the results we were able to achieve in this changing refrigerant marketplace, and we believe that we are well positioned to continue to capitalize on the opportunities being presented within this new market landscape. With that, I'll hand it over to Brian to provide the detailed financial results.

Thank you, Kevin. Revenues for the second quarter increased by 51% to $22 million as compared to $14 million in the second quarter of 2011. The increase in revenues was primarily related to an increase in the average price per pound of certain refrigerants, offset by slight decrease in the number of pounds of other refrigerants sold. Refrigerant-side service revenues increased primarily to an increase in the average revenues per job when compared to the second quarter of 2011.

Gross profit margins increased to 46% for the second quarter of 2012 as compared to 18% in the second quarter of 2011, primarily to the increased price of certain refrigerants. Operating expenses increased during the quarter to $1.8 million compared to $1.2 million in the second quarter of last year, primarily due to an increase in selling expense, payroll costs, and professional fees.

For the quarter we reported net income of $5.1 million or $0.22 per basic and $0.20 per diluted share compared to net income of $781,000 or $0.03 per basic and diluted share in the second quarter of 2011. Revenues for the first six months of 2012 increased 30% to $37 million as compared to revenues of $29 million in the first six months of 2011. The increase in revenues was 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 revenues per job when compared to the first half of 2011.

Gross profit margins increased to 44% for the first six months of 2012 as compared to 22% in the first six months of 2011, primarily due to the increased price of certain refrigerants.

Operating expenses increased during the first half of 2012 to $3.5 million compared to $2.9 million in the first half of last year, primarily due to an increase in selling expense, professional fees and payroll expenses. For the first six months of 2012, we reported net income of $7.6 million, or $0.32 per basic and $0.29 per diluted share compared to net income of $1.9 million or $0.08 per basic and $0.07 per diluted share for the first six months of 2011.

It should be noted -- since 2008 we've reflected statutory tax rate expense, even though we have had net operating loss carryforwards. Consequently, from 2008 to 2011, we've had no material cash tax expense.

As of the six months ended June 30, 2012, we have fully recognized the previously recorded deferred tax asset. And of the $4.7 million of tax expense for the six months ended June 30, 2012, approximately $1.5 million is cash tax expense. In future periods we'll have approximately $1.3 million annually of available net operating loss carryforwards, which would be applied to our taxable income, resulting in a reduction of our future cash tax expense of approximately $500,000 annually.

Lastly, our financial performance this year does not necessarily have a direct correlation to the warm weather. Refrigerants are not similar to heating oil or natural gas. You should not consume or lose refrigerants due to temperature. Typically with warmer weather, there are some benefits for refrigerant sales due to stress and failures of systems. There is no comprehensive data as to this benefit, but we would believe any benefit would be a modest single-digit.

Now turning to the balance sheet, in June we announced that we established a new credit facility with PNC. This new facility is structured similar to the Celtic facility, which in essence supported our working capital needs and enabled us to purchase inventory for sale in future periods.

Our new facility nearly doubles the availability we have with Keltic, but provides a significant reduction in our borrowing costs. We believe that the $27 million line is sufficient for our needs as we move throughout the next three years. Additionally, as we've demonstrated with the Keltic relationship, we believe we have partnered with an institution that can support our growth for many years to come.

As of June 30, 2012, the Company had $33 million in inventory and working capital of $28 million, and excess availability within our credit facility of nearly $10 million. During the first six months of this year, we sought to purchase inventory that previously we may have purchased in the letter part of the year. As we move through the year in anticipation of the EPA's issuance of a final rule, we will value it the opportunity to purchase virgin supplies in order to prepare ourselves for the 2013 refrigerant season.

We are satisfied with our current cash position and working capital levels. As we move through the year, we will continue to generate cash from profitability. We may look to use the cash for additional inventory purchases.

Lastly, the registration statement that we filed in early July has been declared effective. Unfortunately, once a Company is in the registration process, it is restricted by SEC regulations from commenting on the filings that were declared effective. Immediately after our filing, there were a number of posts made by a various communication organizations that were either inaccurate or misleading in their characterization of our registration statement. In fact, one organization agreed to make a clarification to their prior communication.

We are finally, now that the registration statement was declared effective, able to take the opportunity to clear up any miscommunications. This particular registration statement was merely a housekeeping item that the Company needed to complete the process of registering the shares that underlie warrants that were issued back in 2010.

In fact, these shares, to the extent that they were dilutive, would have been included in the Company's calculation of diluted earnings per share since 2010. Therefore, this registration statement does not add any additional shares to the fully diluted number of shares and does not represent a new capital rate by the Company.

At this point, I'd like to turn the call back over to Kevin for some final thoughts.

This was an excellent quarter for our Company, and we'll continue to focus on making sure that our large portfolio of products is in place to drive revenue and earnings growth by capitalizing on our ability to provide the right solutions for our customers.

We believe that the January EPA action that limited the production of virgin 22 and led to the recent R-22 price increases will enhance our long-term growth strategy and help to 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. Operator, we'll now open the call for questions.

(Operator Instructions). Steve Denault, Northland Capital Markets.

I was hoping you could help myself, and I know a lot of the shareholders, reconcile the fact that we've had a pretty good start to the summer, a warm summer. We know wholesale prices at more than doubled, yet you had about a 50% increase in revenue. Can you reconcile that for us?

First off, not all of our revenues are refrigerant sales, and specifically, not all refrigerant sales are R-22. So the idea that one particular product doubled in price does not necessarily automatically indicate that we would double our overall revenues. So that, for all intents and purposes is the reason, and the reconciliation.

A couple of other things jumped out at me. Your inventories had doubled on a sequential basis; typically you're working off inventory this time of year, and then your customer mix went -- three customers equaled 40% of revenue. Is there any change in your business model or dynamic whereby things are becoming more just-in-time in nature, hence would help us understand why volumes shipped were down year over year?

Well, if we focus first -- there's two parts to this -- focus first on the balance sheet, historically we would have purchased gas more heavily or more active in that endeavor, let's say, in the third and fourth quarter. Because of all of the various dynamics that are going on in the marketplace, because we've seen a series of price increases throughout the season, we did take the opportunity to look to purchase refrigerants, let's say, sooner than we might have in the past. So the current balance sheet and the current value of inventory, about $33 million, is high relative to historical perspectives. It doesn't reflect, let's say, just-in-time operations.

What is uncertain is, is there a change in our strategy? Certainly this year there was a change. It doesn't necessarily, at this moment, say that we're changing our long-term strategy. So at some level there were opportunities for us this year. We took advantage of those opportunities, but in terms of the balance sheet, it doesn't necessarily mean there's a change in the strategy.

The second part of the questions was the concentration. We had said earlier, I believe in the March call and the May call, that we're focusing our attention on customers that are changing their behavior. And simplistically, prior to 2012, there wasn't a lot of interest and a lot of behavioral changes by customers in the marketplace relative to reclamation and supporting reclamation. There is beginning that change which we talked about in the script here just a few minutes ago. And so as a result, we're trying to support those customers that are helping to support those changes.

Okay. And considering the shortages that we've all read about in the news, R-22 shortages, and the 100-year hot weather we've had here in the month of July, is there any reason to believe that July would be up sequentially relative to the June quarter -- to the September quarter relative to the June quarter?

Well, as it relates to refrigerant sales for a Company such as ours, we're selling refrigerants, typically, in advance of the actual consumption. So further down the distribution chain and ultimately through the, let's say, homeowner, those activities are happening in July and August; and possibly, the way the weather is going, even September.

Historically, our second quarter is always our strongest quarter. I think it's pretty much been that way almost for, let's say, the last 10 years. So I don't expect this particular refrigerant sales season, even though it's been warmer than average, to be much different.

Back to a comment we made a little earlier, the warmer temperature doesn't necessarily drive significant increases in refrigerant sales. Certainly there's going to be some additional stress, some additional failures. We don't really have conclusive data for the aftermarket, but we think that extra benefit, if you will, is only in the single digits.

But what we are saying is, obviously, the price is still high on R-22, was obviously a major benefit for us for the rest of this year. And also, the increase in reclamation that we have seen thus far this year was started in the second quarter was encouraging.

We're expecting to see more of that in the third quarter here, which is really -- a lot of times you'll see it heavier in the end of the season than in the middle. So we want to see what happens the rest of the year; that's why we're working hard with the reclamation. For what we're seeing, we like what we're seeing.

Again, we say the word mixed bag because not everybody is on board, because they are not positive about whether there is a shortage or not yet. We think that's going to be rectified soon. We can't imagine the EPA is going to back off this would be our guess. From what we're hearing, we feel very confident that next year is going to position us excellent.

The only thing is, even though we may see increased reclamation in the third quarter, which is our belief, the revenue from that would be for next year. So that gas would go into our inventory for 2013. So yes, we like that. And yes, we expect the third quarter to be pretty strong, because, again, refrigerant pricing are up. We haven't seen any signs of the industry -- the air-conditioning loads are not higher, obviously.

This service end should be higher, also, because breakdowns, basically. The more you're taxing systems and they are running full bore, you get a little bit of both. Sometimes it's down, because it's so heavy you can't afford to take a system down. So the service is actually down as they can't afford, again, to shut it.

But what we'll see is usually by the end of this season they'll have to do something. So we'll see what happens this quarter, even more so on the service end -- which whether that's refrigerant sales with it; whether it's just servicing the systems; or whether it's reclamation, all come with it.

So we never say we have individual product lines, that they all stand alone unnecessarily. We really sell a lot of refrigerant on service jobs. From sales of refrigerant, we get service jobs. It is mixed. Or we do energy efficiency off of it. So we're expecting -- we're anxious to see what happens into the third of fourth quarters because of how hot this year was.

Operator, is there a question? More questions?

Greg Garner, Singular Research.

First of all, it looks like a very nice quarter. But I wanted to ask you about some of the commentary that you mentioned about buying the inventory. It appears you might have bought it to take advantage of maybe some price declines and perceptions in the industry covering an array of opinions. It leads made to believe that the pricing might have been fluctuating during the quarter for R-22. Is that a correct assumption?

No, not at all. Just to come back, I think Kevin mentioned it, but we've seen price increases through the season. We do believe there will be price increases in the future. There hasn't been a fluctuation.

Again, what happens in circumstances with price increases, there are sort of inefficiencies in the market as to the dissemination of information and the like. There's also opportunities to work off of prior pricing -- things like that, different elements. So at some level, the activities in the second quarter, you might say, we felt were advantageous to us, and as a consequence, we executed on them.

Okay. Thanks, I appreciate that. And is it all difficult to get inventory from the virgin manufacturers? Are they holding anything back because of that 45% reduction from the EPA? Or is it easy to get it? I'm just trying to get a sense for what the virgin inventory might be in the industry.

Certainly, the producers have, within two hours of the issuance of the no action assurance letter, responded with higher prices and responded with comments to their customers about limits in the supply. Ultimately, the current cap that they are operating under is significantly lower than last year.

So again, the matter by which they serve their customers we couldn't really comment, and the like. But certainly, on the overall basis, the pool from which they could produce to, and therefore sell, is down. So there is certainly in the marketplace from the producer level communication to customers about limiting supplies and the like.

But access to version supply from producers is not necessarily an easy thing, meaning that's one of the things we're proud of, is that Hudson has worked very, very hard over the years to be one of the few that they would sell to in our area of the business.

So access to virgin gas is a big deal. And for a lot of competitors in the industry -- would love to be able to buy able from a producer, but they can't. So it's very difficult, because they don't have necessarily the supply that they always did. But even when they had the supply, getting them to work right with you wasn't necessarily a give me. In fact, it was usually the opposite.

For us, it has grown and grown our supplies. We put ourselves in the position, because again, we weren't shocked this happened this year. We weren't sure of the price and exactly what it would be this year. But we've been betting on it each year, the things were out of our control.

So as this has happened, we kept positioning ourselves, saying, it's going to happen. We know that for sure. What year, when will it be -- it was getting very frustrating. The EPA got another crack at this. Now it's going again. Now they have less gas to deal with. They've gotten even tighter on who they go to, but we're sitting very good with people. And again, it's where we go to the market, how do we go to market. And that's put us in a very good position, again.

What will happen for the rest of this year with EPA and all? It may have put a little uncertainty. I don't think internal in Hudson we feel much uncertainty. I think we feel pretty confident on what's going to happen. Could we be wrong? Could.

We haven't heard that one time in any of the meetings, and we have pushed this very hard down in Washington for years now of what we think they should do. It was nice to see last year that everyone who responded online to EPA website agreed with us, and they put the same kind of comments.

So sure enough, we think that it's down a path. We think that they are just dotting their Is and crossing their Ts and making sure this was the correct thing. So we just want to see this thing come out. And whether it's late this year or whether it's January, we can make a positive argument for either one of them, because we're in a position to benefit, we think, on both.

So yes, we're expecting a good year next year, and we feel -- we can't imagine it would go in any other direction than the way we've lined this up for Hudson to be. And so, yes, we feel very, very good. And so the supply from the producers is a big deal to us, not so easy. And it really wasn't all over the board. It actually looks like it's being controlled in such a way that I think everyone wants the same thing to happen.

Yes. So it sounds like there's not -- I was just trying to get at whether or not -- first of all, I appreciate all your commentary. It's very helpful.

But I was just trying to understand whether or not there might have been, months ago, more virgin inventory built at the manufacturing site, and it was easy to get. At that time, hearing from you, as far as that goes, it doesn't appear to be that that is the case at all.

Well, we don't believe -- and we even said the word basically in the script today. It was -- when we said the word, eating up stockpiles, even, we weren't necessarily meaning at the producer level. We meant downstream. And so the EPA was looking at that. Everyone looks at it and realized there's too much R-22 out there.

So that was a big part of this was that, hey, let's cut this way back. It'll be very lean for everyone, and you'll then have to work off your stockpiles to a point, and they want to bring them down to that level, down -- all the way down.

So we're hoping that is what happened. Nice hot summer; very lean on the producers' end. So we don't think it was coming from the producers' end of saying stockpiles, necessarily. We think downstream, people would have had to do it, because we think that demand was clearly up this year.

And that's why we like what we've heard. Again, we think the EPA will follow their original proposed rule, which will mean cutting it back another 10 million pounds or so starting in January from even this year. So if that all happens, we've eaten a lot of stockpiles away. Yes, I think from all of our industry resources that we have, what we see -- we like what we're seeing for next year.

Okay, thanks. And the reclaiming volumes in the second quarter, were they at all -- any commentary on that? Were they changing from the prior year? I presume they were up from the first quarter, because as I recall, there weren't any really reclamation volume in Q1, but --?

Yes, right, that's right. It is tiny, and they are only -- because you would be getting it from the south, or something like that. Northeast wouldn't be running at all.

But what you would see is -- we saw it every year pretty much just lying flat, except for 2008, when the price started to come up. And so, clearly, in the industry maybe 2 million pounds more came in. So we knew price can drive this and will drive it. And that was always what we said to the EPA. So this year again, the proof would be in the second quarter.

Again, we think it could even been much better if everyone realized there is a shortage. There wasn't actually a sign -- invisible sign to everyone. Some people there was. But from what we saw -- we saw it for us, a very significant increase. And it was -- this was the first year we've seen that.

So yes, we think it is clearly going down the path that we wanted. We would have loved for it to happen earlier in the year and right away in the second quarter in a bigger way that every single, say, wholesaler was paying for the gas, because there is a value there. Even though Hudson was increasing prices as well as others, we thought it might be a little faster down to the end user that he'd be paid -- a little slower coming there; some people jumped in, and that's why the increase.

Some people are slower to the take and they will get there. And so, yes, we like what we're seeing. And again, maybe we thought it could have been a hair faster. We knew the first piece was price increase, the value to the dirty gas, has got to get down to the contractor level, and then it will come to us.

That was always the plan for every year we've been in business, and it's starting to happen right now. And again, we saw a significant increase this year, yes.

So apparently that's working, from your commentary about the distributors bringing more reclamation gas or collecting more dirty gas for reclamation.

Right. That's why on the earlier question too -- it's not that we changed any strategies. It's exactly that. We believe the gas is going to come back to that channel. We've positioned ourselves, we think, pretty well for that, and we are now have the one thing -- we've said every time in conference calls, we're going to set ourselves up exactly for this. More customers, more volume. We'll get deeper penetration in the industry.

The one thing we can't control is the price on 22 or any of the refrigerants, but since we can't do that, we can go down with lobbyists and we can -- with the EPA and give them as much information as they can to help. Others have done the same. We can do that piece and try to influence in the sense of giving them some facts.

We've done all of that, and this is the first time we're seeing the one piece we couldn't control. I think I said last year on a conference call at the second quarter -- third quarter, maybe -- we've been fighting this for a while. It will happen. And what you'll see is what did Hudson build during the time when the price was going backwards? It will be evident when the price starts to turn around, because we have more customers, more volume.

We had double-digit revenue growth every single year, except 2009, with prices going backwards. And we did that because we knew once it starts to turn around, then we'll be in the best position. So this was what we planned for. We weren't worried that this wasn't going to happen; it was when it was going to happen. We couldn't control it. So yes, it's noticeable this year, the difference.

Yes, it certainly seems like you're well-positioned for it the dynamic changes in the industry in the long term. But just looking back on Q2, was the average price still approximately 2.5 times what it was last year in Q2 for R-22?

The price in the quarter was more representative and reflective of that price increase, whereas in the first quarter, we were transitioning up into that. So yes, it really reflected the overall pricing dynamic.

It seems like the value of your inventory and your balance sheet is up about 2.5 times. And if that is the same as the price, then it's really the volume of that inventory is probably not that different than what it was last year, or if there had not been the changes that occurred this year in the industry. Is that a proper assessment?

We're starting to get into some extra granularity on things -- the nature of the product, pricing, this and that. We certainly felt that the activities in the second quarter and the opportunities in the second quarter for purchasing the product were advantageous. If they were simply matching pricing, I wouldn't necessarily consider them advantageous.

Okay. And the platinum program obviously is successful, given that you are indicating more dirty gas coming in. Is there any sense for the volume of dirty gas coming in or how that's changing relative to what it was in prior years?

Again, we didn't really see much increase year to year except for 2008 on increased pounds. We said more customers. We grew it. There's no question; it did come up. But it wasn't a jump any particular year. There has been a noticeable jump this year, significant. It doesn't look like any other year we've seen.

And it's only, for us, for the reclamation portion of the time of the year, it's the starting point. So we're already seeing something significant. Again, we had hoped it could have been even more. With these price increases, we thought it could be more. We know it will be. We feel confident it will be. But we thought maybe it would be in this summer -- and it still can, meaning the major gas doesn't come back yet.

But it's noticeable this year. We think the platinum program is the best program out there. We tailored it for a specific reason that way, and we put on it also the guarantee of gas for next year. So when we talked about this even last quarter, the one benefit of the platinum program -- there's a whole bunch of things involved for cross-contaminated gas, taking the risks out.

There's a lot of things that are benefits in that program, the people, but one of the things that we said is what is your pain point? Is your pain point the price on 22, and we'll get you money for it, and that's one. Or is it the availability of 22? If you're worried you're not going to get it, that will be another reason for you to do it, if we're guaranteeing pound-for-pound replacement, and we still believe that.

The only thing that held it up at spec is that we don't know that a lot of people out there still, because the EPA has not come out with the final rule, it's the one dynamic we can't -- again, we want them to come out only because we think once they do -- we think we're pretty clear on what they are going to do, we think. And when they do, I think everyone will know that there will be the shortage. And once that is gone, then the benefit of that guarantee of pounds will mean more to other people.

So some people love that, because they're worried about the gas in the future. Others are saying, you know, we're not so worried about it, because there is a lot of 22 out there. Well, I think they're going to find out that that might not be true, and then it will mean more. So as soon as we get past that, I think the other dynamic, not just price, but the availability of new gas or cleaned, reclaimed gas, we'll be able to sell to them.

Okay, and just one question on the EPA. In your experience, in seeing how they come out, in the timing of their commentary, even though they indicated that it was going to be done by this fall, or September, I think, is what they said, but you're thinking that it could even be delayed until after the end of the year.

Is this just -- is how the EPA normally reacts? Or is that why you're not really thinking the EPA might come out this fall? I guess from your experience in working with the EPA, it's still the window -- sort of a wide timeframe there as to when they might come out with their final determination?

Well, again, there are more fingers involved in this than the EPA. EPA sends it to OMB, and then back to the EPA again. There are the steps involved that they have to do.

Right now they have -- again, that's why I say it looks -- certain things it sure looks like to us from talking with EPA, talking to others who have talked to the EPA. It looks, it appears to us that the EPA knows what they are going to do, obviously, and they came out with a proposed rule. They put no-action assurance letters out in January that went right along with the most severe cuts of it.

That ended it. We don't believe there is a chance that you're going to see a final rule soon. We think it will be earliest at the end of the year. It's possible to us it could roll into January. And again, from a Hudson point of view, we could see benefits in either one. Because again, if it rolled into what it did -- the same thing happened this year, you get no-action assurance letters. You can't bring any new gas in. You're going to have to be eating off of any stockpiles that there are until they do did do a final rule. We can see a positive in every one of these things that could happen.

So one negative is we would like it sooner than later for the industry to know. We think a lot of people know, but the ones that don't, that there is going to be a shortage. And that should be very clear that you should be looking at supplies of gas and that should be reclaimed gas returned to you.

So that's the one thing -- we would like them to come out sooner. But we feel pretty confident they're going to be coming out -- earliest would be late this year. And we would just have trouble believing that the EPA would actually retract from what they originally came out with -- the proposed rule at the end of the year. We can't imagine coming back on that. But feel very comfortable with that.

Okay, great, thanks. I've taken up a lot of time already. Thank you very much, gentlemen. Congratulations on a good quarter, too. Thanks.

Thank you.

Arthur Winston, Pilot Advisors.

Okay, I've got two questions. My first one is, could you very quickly just repeat what you said about the rationale and the strategy for building up the inventories? You went fast, and unfortunately, I couldn't follow it that well.

Well, there was two parts, I think, to the questions earlier. Is there some sort of long-term strategic change? And the first answer to that was, not necessarily. In this particular year the circumstances are probably different than any of the prior years because of the no-action assurance letters and so forth.

The second part of the discussion was around our decision and the timing, and basically we thought there were opportunities that were occurring in the second quarter, and we thought they were advantageous. So as a consequence, we executed on them.

Okay. My second question is if you were to eliminate the refrigerant which is either in oversupply or not much demand, and that influenced the rate of growth in sales -- so if we knock that out, can you give us a sense without numbers -- would you have gross profit margin percentage significantly been higher as we may believe that refrigerant never existed?

That refrigerant certainly would be extremely lower margins than the other products. Going back to this whole dynamic about HFCs, we've been through a period of time, let's say for five, eight years, whatever the length of time might be, where certainly tremendous additional capacity being built up in Asia, particularly in China.

But that capacity was not in direct alignment with demand. And demand had been fairly healthy, and supply was probably equal to demand at some level. What we've seen, particularly in the last 12 months, is a massive add of capacity, but not, let's say, any significant growth.

So as you can imagine, the whole supply/demand dynamics have flipped. And so as a result, the margins have been compressed, and in the situation where it's not necessarily attractive business, but it's important business, because it helps supplement and complement whatever needs our customers may have.

And while it's difficult to predict the future and so forth, we see this circumstance on the HFCs as not necessarily temporary to 2012, but on an overall basis, it's not -- HFCs are not material to the overall aftermarket. So at the end of the day, things might balance out. There is expectation HFC global demand will grow. So at the end of the day, these things could work themselves out. But in the near term, they may not.

I understand. I just have one quick question. If you look at your strategy up until this afternoon, this morning, given the circumstances and the changes and the fluctuations of the industry, has any part of your strategy not been the right call, and are you reversing any part of what you've implemented over the past 18 months, given the rulings?

I wouldn't think so, meaning we're refining this all the time. And there's a number of steps that we did for years now that seemed -- if ever we questioned it, it would have been then, meaning there is no growth in reclamation as the prices are increasing. This is tough sitting where we're sitting in the marketplace, meaning we're not going way down low in the market to get the gas. We try to stick with the channels that we planned on forever, and maybe competitors, others, went around that and not worried about it.

Because we stuck with what we did, our relationships from the supply side of gas are very strong. The relationships with, say, distributors, very, very strong, because we didn't go downstream.

So we're very happy with that pick that we did and stayed where we were going to stay. And we feel very strong right there. And we think, clearly, the price -- as we always said -- it's not -- I won't say we weren't surprised that the price jumped like it did in January, okay? Starting this year.

We thought it would come up. We thought it would come up significantly. That was a pretty healthy jump. But we absolutely thought it would be this high by 2012. We just thought it would have happened in 2010 and some serious jumps each year.

But it didn't, because of what we've always described as to what happened in the industry as to why this didn't happen -- it was delayed, and here it came. We kept sticking to our guns that this is exactly what's going to happen. The price will come up. We could pay for more. It will come back. Everything looks in line, still, exactly with what we thought.

Now, we had experience with this. We saw this with the CFCs. So this wasn't necessarily new to us. We weren't shocked that it should happen like this. So we weren't -- got lucky and said, hey, we actually had a little bit of information from previous years with the CFC phaseout.

So it helped us. I can't say that I would say our strategy -- that we are picking it apart in the sense that we would do something different than what we were doing. We are enhancing it, and we're doing some things, and we're hopefully going to be putting some newer things in place to make this Platinum Program, for one. And other offerings better -- not that we wouldn't have done what we did.

We have worked on a number of things that we think can make this thing significantly better for next year, and much more aggressive program to get it. We believe we'll have rolled out for next year. And we're working on that right now. But not different than what we're doing, just better.

Perfect. That's the end of the questions. Thank you.

David Anderson, Anderson, Hoagland and Company.

Could you give -- I'm interested and a little color on the concept of the sustainability of demand. And what I mean specifically is are the dynamics different in the residential market versus the commercial market? Is it true that, for example, it's very difficult to convert a large commercial unit from one refrigerant to another, and therefore the demand for R-22 is likely to last much longer than people might initially assume?

I think a couple of things. One is, first of all, on the residential side, you're not going to convert the unit on the residential side. You can't put R-22 -- I shouldn't say you can't. There are drop-in replacements that people will put out there. We don't think it's going to be much of the market, but there are some that producers have that you could possibly put into the unit, not necessarily the same capacity, same efficiency.

The real opportunity is one or the other. Either you replace the unit to an R410-A unit, because you can't put 410-A in the system, which is the gas they're going to, or you limp along on your 22 and use reclaimed gas in the future to fill it.

So in that market we see two things happening. One is, say you said it's a 5% attrition rate per year. And they last about 20 years, the life of the unit. So the logic is, the EPA would model this in their vintaging model; that it would -- basically, 22 demand should go away, say 5%, or whatever the number is around that area, as the units get pulled out.

But what ended up happening is -- two things happened. The economy did what it did, so people don't want to spend for a 410-A system, necessarily, when it's much easier to keep your 22 system alive. Or now there is another option, and that is called a dry ship units, where you can buy the heart of the unit, the condensing unit, without refrigerant in it.

So you can go out and buy a brand-new R-22 condensing unit; put after-market refrigerants -- again, increase the demand now, because now you're using after-market refrigerants. And a significant piece of the market is now being served by those units. So what we're seeing is brand-new units with a 20-year life going out really at a higher rate than the attrition rates of old units going away. So that's the biggest part of the market -- your residential market.

Right, and I happen to know that, because I just replaced two in two different cities -- one in Missouri and one in Colorado. And you're exactly right, that was the recommendation. But when I questioned these guys, talk about the difference in the decision with the commercial market.

Well, the difference is, there is not really -- you wouldn't do a drop-in, okay? So say you had -- it depends on where you talk commercial. If you take it more industrial, bigger chiller systems, again, to commit to change an R-22 unit is an expensive proposition. These units can last a long time.

So to retrofit that unit, you have to go to another gas in the commercial space, which you can't use 410-A for a flooded evaporator, say. So say the gas 410-A has now replaced R-22. It's not applicable to take 410-A and use that in an R-22 commercial system unless it's a reciprocating system, which is a smaller commercial unit.

The bigger commercial units you're not going to be able to just replace it straight on. You're going to limp along even more so on those than you would ever think to replace the unit.

So again, it's really the opportunity -- the only place where you would probably see someone, say, demand going down would be in the residential market. But again, as I said, because of the dry ship units and because of the economy, we don't see that declining as fast as the EPA said.

So it's less in the commercial market than we'd ever see a decline on R-22 use. If you have a R-22 unit, you're probably going to stick with that R-22 unit.

So this means that your strategy really has some running room here in terms of supplying reclaimed gas to a market where there's going to be good demand for five or 10 or 15 years?

Absolutely, we think that. And here's the thing, too. You take the CFC phase, and we compare it to CFC, and we're always comparing it to the CFC phaseout because there is some dead comparisons. There are some other ones that are not very good comparisons, and that's the longevity of the systems, or of the phaseout.

When CFCs let away, primarily your car -- your car air-conditioning, for one, was not going to last like your home air conditioner, about half the life. A smaller piece of the market, and there were retrofit gases. And 134-A, which is in it now, you could've used.

So you knew that that thing was going to have a shorter life. When you say the bigger part of the market, 60%, 70% of the market being R-22, the systems are going to be a lasting, obviously, way longer. You have brand-new systems with a 20-year life coming out now that are still going to need R-22.

Everything tells us that R-22 is going to be used for a long time, and 100% of what's in the aftermarket is eventually going to be pure reclaimed gas. Now, it has to be pure reclaimed gas after 2020.

We believe that if the reclamation jumps up like we're hoping, that when the EPA -- right now they are putting the final rule. It will be till the end of 2014. That means, again, starting 2015, nobody can produce any, unless the EPA allows them to produce more for those years.

It's potentially possible, we don't know if it will happen, if reclamation will jump up and can grab the bigger part of this market, they can make the case that they don't have to produce anything after 2014, which would mean it is 100% reclamation market to serve this massive market out there starting in 2015.

Now we don't know that's going to happen, but we know for sure it can only go to 2020. But again -- and declining every year the amount of production of new gas. So everything tells us reclamation is going to jump way up to serve this market, absolutely, in 10, 20 years. That's what we're going for.

Right. And that's why you can say in your remarks that this is a long-term service bet, not a commodity price bet.

Absolutely.

That there is a real business here with some long-term running room.

Well, absolutely. And one other thing, let me say too, is no matter what gas -- as it goes pound for pound away, it's replaced with something else in every one of those gases we clean and sell.

So if it happened to be some weird thing that R-22 started to go away replacing the 410-A, we'd clean it, and we'd sell it, too. We just like the opportunity of the phaseout to take advantage of the price increases which allows us to get more reclaimed gas. But you have to reclaim all the gases. So again, the market just keeps getting larger for us.

Okay. Very good. Thanks for your help.

Sure.

Joe Delahoussaye, MindShare Capital.

A couple of questions. Most of them have been answered by the previous callers. But some discussion on the wholesale price that you guys saw in the second quarter as related to first quarter -- I was trying to make sense of how you described that.

In the first quarter you said prices had jumped to like $10 or $12 for R-22 per pound. Could you quantify exactly what prices you were seeing in the second quarter?

The comment we were mentioning earlier really had to do with price increases that don't translate to immediate adjustment to the sale prices. There's always some sort of lag. So when we were trying to comment a few moments ago about was that in the first quarter, we were going through a period of price increases. So therefore, the results of the first quarter were not indicative throughout that 90-day period of the price increases, whereas opposed to the second quarter, it would have been.

I don't believe that we would have said that in the first quarter the price would have been at $12. We would have I think said, $9 to $10 kind of a number. It would have been $9 to $10, or around $10, or something quite like that.

Certainly in the second quarter we saw that more consistently. We certainly in the second quarter started to see, particularly from the producers, a lead again in price increases, little bit higher to, let's say, $11. Certainly you might have heard $12 in others.

Sometimes you hear prices in the marketplace that might be further down the chain. So I'm not sure your perspective or what kind of information you may be gathering. Ultimately, at the end of the day, as it relates to price, to the extent you're out in the market trying to gather information on that, we will always suggest looking at it from a trending perspective -- what is the trend? And certainly, the trend has been in the second quarter for additional increases.

Additional increases from the first quarter?

Yes.

I see. Okay. And have you seen that trend continuing into the third quarter, or is it leveling off to some degree?

It's difficult to say where the trend is. It looks like it's continuing to increase. By the third quarter, again, you start to end in -- you're in theory wading into the season again. That's why the second quarter is always the strongest quarter. We talked about that earlier.

The third quarter you start to tail off into the season. We are seeing trending of price increases. At the end of the day, we certainly are going to keep an eye on it, certainly report to you all on that -- how the third quarter ended up. And if we had to guess, we'd have to say that they are going to continue.

Okay. And since the second quarter is typically your strongest quarter of the year, we said gross margins were 46%. They were 40% in the first quarter.

For the third quarter would we then maybe expect to see margin somewhere in between those two levels -- 40% to 46%, somewhere in there? Or are there other dynamics at play that could make it somewhat stronger, somewhat weaker than a simple guesstimate like that?

Typically the third quarter, the one thing that is uncertain is the overall volume. So that will affect the overall margins. But it's certainly -- in the second quarter, because of the volumes and everything else, you're probably at the peak in terms of margins and the like. So I think your assessments are generally accurate. You would expect in the third quarter at some level, again, depending on the volumes and so forth, it could be down off the second quarter and so forth.

And I had seen in your filing that you mentioned that volumes I guess of refrigerant sales were down on a year-over-year basis. I guess I'm just trying to understand a little bit how that could have happened. I guess maybe some details on how volumes could be down year over year in such a -- warmer weather; I know you gave some explanations of how that doesn't exactly correlate, but just any thoughts there?

There are multiple refrigerants in the marketplace. So you may hear acronym CFCs, HCFCs, HFCs. But with each of these acronyms there is multiple gases. So the market isn't solely one product, and it's certainly not just R-22.

We earlier in our remarks characterized the HFC dynamics, and there's quite a number of different HFCs for different applications. And eventually the entire market -- now, it's going to take a long time to get there, but the entire market will eventually become HFCs. But right now, it's a small percentage of the market.

But relative now specifically to HFCs, the pounds have been down this year. The pounds have been down this year because there's been a significant increase in production, particularly in Asia, particularly in China. And we're seeing signs of excess production relative to demand, and price decreases, and margin compression and all those kinds of things that come with those kinds of dynamics.

Now, it's affecting the current year overall in terms of sales volume. We're not certain how long this is going to last, but certainly for the moment, we've seen a situation where production has probably outpaced demand. And so as a consequence, the volumes in that particular area have been down.

But volumes overall for your business have been down year over year as well. And you said HFCs were a small component of your volumes. Is that right?

That's correct.

So other areas must also be down as well. Other refrigerant sales must be down.

The only refrigerant grouping we have commented on are the HFCs, and they were down.

Okay. And again, that's a small component of your business.

That's right.

Well, is it safe to say that the R-22 sales specifically, or volumes, are maybe 15%, 20% of your total refrigerant sales? Or is that even a little high?

We don't disclose that. The only thing we disclose is in the overall market, we believe in the aftermarket -- excuse me. We believe -- in the aftermarket, we believe R-22 to be above 60% of the aftermarket.

Right, for the industry as a whole, right?

Correct.

Right. Okay. And when you are speaking about the EPA guidelines that they're supposed to be issuing later this fall or early next year, you said that if they don't institute or give their ruling by the start of the new year, then up until they do give some sort of ruling, that industry buying for 2013 can't be any higher for virgin R-22 then it is for 2012, which includes the 45% less?

No. Starting in January 1, if there is no final rule -- right now, until there is a rule, you can produce or import zero pounds for R-22 for 2013. Okay? So that's how the year starts for 2013, unless they come out with a rule in 2012 that tells you what it is.

If we find ourselves going into 2013 and the EPA has not issued a final rule yet -- so you can't import or produce any pounds. So what we're is saying is -- and that is exactly how 2012 started. So January came along. They hadn't come up with the final rule. Everyone was waiting for the no-action assurance letters to allow them to produce X, whatever they come up with.

They had the proposed rule in January. It wasn't finalized -- still couldn't. Then that proposed rule came out and said, this will be the range -- nobody can produce still. Had to wait until the no-action assurance letters came out at the end of January. And that was the first time producers knew how much they could produce or importers could import for our market.

So for January of 2012, the only gas that could have gone into the market would have been gas that was already produced or stockpiled or whatever. So that could happen again.

It would happen, actually, if they don't come out until January or whatever next year -- which we don't know that that's the case. We know it has to be later this year at the earliest, or say, January or so next year.

Okay, that clears it up for me. Okay, that's -- I guess from your comments that went along with the earnings release as well as prepared remarks today, it seems like I sense a little bit of frustration in the reclamation activity.

You commented that some people just don't simply believe there is a shortage looming for R-22, and perhaps that's impacting your business, and maybe that's what the market is perhaps peeking up on? Is that maybe a fair assessment of how things are -- how you guys are viewing -- ?

Are you saying that we sounded frustrated with it, you are saying?

Yes, you guys commented that the market is just unsure, and until the EPA --

No, we were just stating the fact. That wasn't -- we aren't frustrated at all. The fact of the matter is this. We have been planning this for a long time. So when this happened this year, this thing is coming right down the path that we thought. Maybe a speck slower in this summer. I don't know if I'd want to say that that's true, because we're seeing significant growth.

So we've been waiting for this for a lot of years. We're very excited about it. We're very excited about our plans for next year. So no, if I sounded frustrated, I'm sorry, we were just trying to make points that we would think that everyone in the industry would know this is coming, and they'd be paying big money for the gas downstream, and we'd be running at even higher volumes, possibly.

But we can't expect it to change overnight. Not everybody is in this business full time -- meaning they sell a lot of products. Refrigerants are only one piece. So they can't be as close to the refrigerant market as we are.

So maybe that's a piece of it. We do think the EPA -- because it's not final yet, it's made uncertainty. We don't mean it as we're really frustrated; we think it could be better if it wasn't uncertainty, but we think it's pretty good even without it.

So we think it's clearly coming, and it's going to be very certain. So we're ecstatic that finally we're in a year that's -- what we've been begging and pounding the EPA for for years is on us. So no, I didn't mean in any way that we're frustrated -- not in any way.

Okay, that's good to know. And then the last question is you guys were happy -- or I guess, the reclamation volumes that you did see in the second quarter, was that within your internal plans heading into the second quarter? Or was it maybe slightly less -- just because you guys thought maybe it could pick up, or it accelerated a little quicker --?

well, if you asked the same question in December, we would have had a different answer because unless we saw a price increase, we didn't know how to get the pounds moving. And we knew that for years. And that's why we pounded the EPA.

So in December, going into the year, our budget numbers, all of that going in -- we couldn't have positively -- we knew they had to come out with a rule. We did assume they are going to cut this thing back. How far will they, we didn't know. And that would affect the price. That was the one unknown.

If you said, do we think price is coming up this year, we would have said yes. And with that, we can pay more for the gas, or we could drive reclamation, all of that.

But it was hard to say how significant. Now we enter the second quarter of this year with the facts that we knew, the fact that it was a significant increase. Internally, I guess maybe we would have thought that everyone would have gotten it right away where we're headed and you better jump in instantly.

Well, that's not what everybody does for a living. So maybe we were optimistic with our customers. But a lot of them did do it. So we are seeing the jump. So I don't want to say we weren't -- that we didn't meet our expectations, because that's not necessarily true, either.

We just maybe -- some of us thought it could've been earlier, just from the fact that the price was as high as it was. But again, we're early in the season, still, so -- as far as for when we get a lot of pounds back. So it's hard to say what it will end up being. So no, it's not that it didn't meet our expectations.

Okay, great. Well, nice quarter, and thank you.

Thanks.

Craig Hoagland, Anderson, Hoagland and Company.

I'm still trying to get a handle on just what drove the decline in volumes in the quarter and year to date, and I'm wondering specifically if the customers that didn't want to join the Platinum Program might have gone to another source since they had a different view about reclamation. And number two, or did potentially some of that volume get served by customers using up stockpiles rather than buying gas from you or somebody else?

The decline in volume has nothing to do with R-22, reclaimed, anything like that. The decline in volume is specific to a grouping of gases called HFCs.

Okay.

So it is the HFCs -- the decline in volume with regard to HFCs is more to do with excess supply, and excess supply coming from Asia, and adding capacity that has occurred over the last 12 months.

Now, HFC demand globally will grow, and will grow at a fairly decent rate. But overall, HFCs are not the material portion of the marketplace. R-22 and HCFCs are, in fact, material. They are over 60% of the aftermarket. The decline has nothing to do with all of our activities and our support for reclamation and the like. In fact, as Kevin said, reclamation is up.

What -- all that is happening relative to reclamation and R-22 that we wanted to describe for everyone is the idea that everyone jumped in the pool, is it happening? A lot of people are, but some aren't. And the ones that aren't, really aren't -- we believe most likely because there isn't a direct certainty, because we don't have a final rule. So at the end of the day, that's the circumstances that we're in.

However, things are going well. And we do absolutely have customers that are gone from the old days of charging to not just stop charging, but actually paying. So the things that we expect to happen are happening.

We would like it to happen; obviously, you would like things to be better. It's just that at the moment, there's some people that, let's say, are sitting on the sidelines, if that's another way of saying it, because of -- what's the EPA really going to do?

And we're pretty confident we know what they're going to do. And all the signs seem to indicate they're going to continue this. Because this is what the EPA has set to do, which is to reduce the number of pounds of R-22 that can be produced going forward.

So all the signs are there. All the commentary is the same as our commentary -- continued with these maximum reductions and the phase down. It's just that some people may not either be aware of it entirely or believe it until it is certain.

Okay. Well, customers who are not bringing you their dirty gas, is the assumption then that they are venting it? Or is there another avenue they could take with their dirty gas?

There are always been in our industry roughly 20 other reclaimers in our country. And a couple of them are bigger guys. Again, we believe Hudson is the largest reclaimer, but there's other avenues to send the gas for reclaim.

It doesn't mean they are necessarily venting it. But again, we put in programs -- we think at the growth gets bigger we can grab market share. And we already started with a significant market share as the largest. We think we'll grow.

And we think the pounds will come up; we think our market share will come up, but it doesn't mean but that there won't be options for them to go to another reclaimer -- maybe there's somebody, a little mom-and-pop that's a mile from their facility, and maybe they'll go there. It's hard to say with certainty. There's no way you're going to get everybody in the country.

Okay, thanks, guys.

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

Okay, well, we'd like to thank, first of all, our employees for their dedication toward the success of this Company. And we'd also like to thank our long-term shareholders for their support. And we welcome those of you who are new to the story. We look forward to speaking with you after the close of our third quarter. Thank you very much. Goodbye.

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