Hudson Technologies Inc (HDSN) 2017 Q2 法說會逐字稿

Greetings, and welcome to Hudson's conference call to discuss their definitive agreement to acquire Airgas-Refrigerants as well as their second quarter results. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, John Nesbett, of IMS. Thank you, Mr. Nesbett, you may begin.

Good afternoon. On the call today, we have Kevin Zugibe, Chairman and Chief Executive Officer; and Brian Coleman, President and Chief Operating Officer of Hudson. Now on this afternoon after the market closed, Hudson announced both the definitive agreement to acquire Airgas-Refrigerants as well as its second quarter financial results. On the call this afternoon, management will review its second quarter results and then will provide an overview of its proposed acquisition of Airgas-Refrigerants. Finally, we will then open the call up for questions.

Importantly, there is a slide presentation, which will only accompany the acquisition discussion. This slide presentation can be accessed on the Investor Relations section of the company website. Please go to www.hudsontech.com, click on the Investor Relations tab in the upper right-hand corner and select the Events & Presentations tab, which is the fourth in the drop-down menu. When you reach the Events & Presentations page, you'll see the slide deck on the right-hand side of the page, it's on the top right side of the page. As a backup, you can also access the deck through the web link, which is available for the call. This is a user-controlled deck, so viewers will be responsible for advancing the slides, and management will prompt you as we advance through the deck.

Okay, I'll now take a moment to read the Safe Harbor statement. During the course of this conference call, we will make certain forward-looking statements. All statements that address expectations, opinions or predictions about the future are forward-looking statements. Although they reflect our current expectations and are based on our best view of the industry and business as we see them today, they're not guarantees of future performance. These statements involve a number of risks and assumptions, and since those elements can change, we would ask that you interpret them in that light. We urge you to review Hudson's Form 10-K and other SEC filings for a discussion of the principal risks and uncertainties that affect our performance and the factors that could cause actual results to differ materially.

Okay, with that, I'd now like to turn the call over to Kevin. Go ahead, Kevin.

Good afternoon, and thank you for joining us. We have few very exciting announcements after the close today. First, Brian and I will briefly review the second quarter results, and then we will provide you an overview of our definitive agreement to acquire Airgas-Refrigerants, which we also announced after the close today.

First on our review of the quarter. Our second quarter was particularly strong, reflecting record revenues and revenue growth, improved gross margin and significantly increased profitability. The second quarter represents the midpoint of our 9-month selling season, and we benefited from increased sales volume and higher average pricing for R-22 refrigerants as well as what was a temporary spike in pricing of HFC refrigerants. While we're very pleased to have delivered very strong second quarter results, particularly related to HFC pricing, since the close of the second quarter, we have seen a moderation in both volume and pricing for all refrigerants. We have seen R-22 prices decrease to roughly $18 per pound. In addition, as we predicted, the spike in HFC pricing that we saw in the second quarter is retracting as the supply and balance from Chinese producers were beginning to subside.

As we have said for several years, these ebbs and flows in pricing and volume during the cooling season are not unusual, which is frankly why we emphasize and encourage everyone to think of our business effectively over the 9 months ended September as opposed to a quarter-to-quarter comparison.

The R-22 refrigerant sales season has taken a different trajectory than the HFC market. In the first quarter of 2017, producers aggressively raised their pricing in R-22, and 1 producer got out ahead of others and aggressively sold product in the first quarter that would otherwise have been available for sale later in the season. This advanced selling activity created excess supply in the marketplace. Additionally, we had a cool May and early June in the north and northeast, an area which typically drives a significant amount of seasonal R-22 demand.

With the cool temperatures, we saw a slower start to the cooling season. These factors coupled with a slight rise in demand for substitutes particularly in the second quarter created the recent pricing pressure on R-22 that we anticipate will likely last the remainder of 2017 cooling season. We believe all these conditions are temporary and that their effects will be concentrated to the latter part of the selling season.

Regarding HFCs. Around the time of our first quarter 2017 call, we were beginning to see signs of global market disruptions and predicted that we may see volatility HFC pricing for the cooling season. As it turned out, there was a severe although temporary supply and demand imbalance. This disruption is beginning to subside, and we believe that at the end of the third quarter of '17, HFC pricing will return to levels similar to that at the beginning of the year. Consequently, we will likely encounter gross margin headwinds from R-22 and HFCs during the third quarter of '17 when comparing the exceptional margin performance in the first half of '17 and the third quarter of 2016.

On a long-term basis, we remain encouraged by the opportunities that R-22 will provide for many years to come and also by the understanding that as the industry transitions away from R-22, the role of next-generation refrigerants, HFCs, will steadily increase as nearly all new equipment including the equipment that's replacing R-22 units runs on HFCs.

These HFCs have also been identified for phase down beginning in 2019, and we believe this phase down represents a significant long-term opportunity for Hudson. As with their larger installed base, we anticipate that the HFC reclamation opportunity has the potential to be larger than the current R-22 opportunity.

We're very pleased to have built on the momentum of our strong first quarter performance to deliver record growth and profitability in the second quarter of 2017.

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

Thank you, Kevin. Revenues for the second quarter increased by 51% to $52.2 million as compared to $34.6 million in the second quarter of 2016. The revenue increase was primarily driven by an increase in both volume and price of certain refrigerants. Gross margins for the quarter were 33% as compared to 30% in the same quarter last year.

Operating expenses for the quarter increased to $3.5 million compared to $2.3 million in the previous year quarter. The increase in operating expenses is primarily due to $800,000 of non-recurring operating expenses related to corporate development initiatives.

Net income for the quarter was $8.5 million or $0.21 per basic and $0.20 per diluted share compared to net income of $4.8 million or $0.15 per basic and $0.14 per diluted share in the second quarter of 2016.

Our balance sheet remained strong. Our cash balance was $33.7 million as of June 30, 2017, primarily due to the capital raise that we completed in December of 2016. This capital provided us with a solid platform to evaluate and execute M&A opportunities, such as the one we're about to discuss.

Additionally, as of June 30, 2017, the company had $64.6 million in inventory compared to $68.6 million at December 31, 2016. Moreover, at the end of the first quarter, we had approximately $113 million of working capital.

I will now turn the call back over to Kevin.

Okay. Thank you, Brian. I would like to shift gears and share some exciting news with you about our definitive agreement to acquire Airgas-Refrigerants. As a reminder, there is a slide deck that will accompany our discussion of the acquisition. This slide deck can be accessed on the Investor Relations section of the company website at hudsontech.com under the Events and Presentations tab.

Let me start by saying we're very pleased to announce our agreement to acquire Airgas-Refrigerants, or ARI, which we believe represents a major milestone for our company. The addition of Airgas-Refrigerants is expected to double the size of our business, provide a complementary product portfolio, significantly grow our customer base and enhance our sales and distribution capabilities.

Before I jump into the details of the announcement, as a reminder, the transaction is not yet closed and is subject to an antitrust review and the customary closing conditions. So as I'm sure, you can respect these limits to the extent of our information we can provide at this time. That being said, we look forward to providing more specifics after the transaction closes, which we expect to do later in 2017.

Please refer to Slide 1 for the safe harbor statement.

Slide 2 takes us through some of the specifics of the acquisitions. Brian will take us through the additional financial details later in the call, but in short we're acquiring Airgas-Refrigerants for $220 million, subject to closing and post-closing adjustments. And we expect to finance the deal with the combination of balance sheet cash and new debt. We won't issue additional equity for this transaction.

Airgas-Refrigerants, a subsidiary of Airgas, Inc., an Air Liquide company, is a refrigerant distributor and EPA certified reclaimer in the U.S., sourcing and reclaiming refrigerants for sale to a variety of end users, which is complementary to our business. They are a well-respected company with an excellent management team. They have a long history in the refrigerant industry, and we're excited to have this opportunity to combine our operations, which provides a unique opportunity to scale our business.

In March 31, 2017, trailing 12-month pro forma revenue of the combined business is approximately $250 million. The transaction is expected to be accretive to earnings beginning 1 year following the close of the transaction. As I mentioned, we anticipate the transaction will close in 2017. As with most deals of this size, the transaction is subject to waiting periods under the HSR Antitrust Improvements Act and customary closing conditions.

Slide 3 depicts how complementary these 2 businesses are. Airgas-Refrigerants is a part of Airgas, which was a public company until it was acquired by Air Liquide in 2016. The acquisition of ARI announced today essentially doubled the size of our business while strengthening our product and service offerings, expanding our geographic reach in the U.S. and providing a significantly enhanced management team and employee base. While there are a lot of complementary elements to the 2 businesses, the 1 element that ARI does not have is the energy services component, which we see is an upside for the combined businesses.

Slide 4 highlights the strategic business benefits of the combined -- of the combination of Hudson Technologies and Airgas-Refrigerants. Specifically, this acquisition is expected to strengthen our current operations by providing the following benefits: ARI's large customer base for HFCs positions Hudson to better serve an expanded customer base during the future phasedown of HFCs, expanded customer network increases access to refrigerants and strengthens the distribution capabilities, anticipated cross-selling of Hudson services to ARI's existing customer base, increased processing capacity to support the anticipated growth in reclamation volume from the ongoing phaseout of HCFC production and expected future phaseouts, enhanced geographic footprint in the U.S. and strategic purchase of valuable refrigerant inventory will more than double Hudson's existing inventory balance.

On Slide 5. We take you through the evolution of our industry to help highlight why this acquisition positions us so favorably for long-term growth. As we've often discussed, the ongoing phaseout of HCFC refrigerants and the expected future phaseout of HFC refrigerants represents a tremendous growth opportunity for Hudson. Hudson has experience in managing the shift from 1 class of gas to the next. The current phaseout of HCFCs is similar to what happens with chlorofluorocarbons or CFCs and what is expected to happen with HFCs. We believe the combined company will be better positioned to serve customers during the ongoing phaseout of HCFCs and positions us to serve an expanded customer base during the future phasedown of HFCs. In the near term, we expect to benefit from ARI's higher volume of HFC sales as the industry shifts from R-22 to HFCs. Currently, Hudson is seeing increased HFC sale activity and ARI has strong HFC business.

With the continued evaluation -- evolution of our industry, we believe this acquisition provides increased access to legacy as well as next-generation gases and expands and diversifies our product offerings, our application capabilities and our customer base. By combining with ARI, we are positioning our business for continued growth and profitability as the industry transitions to new technologies and gases.

Slide 6 provides a snapshot of what Hudson's new expanded operations will look like. To the left, you can see the map depicting extended geographic coverage of the combined operations. At close, the customer base of the combined company would grow to more than 7,000 and we'll have more than 2 million pounds of additional reclamation processing capacity.

We'll also increase our employee count, with the addition of ARI's experienced leadership team as well as the seasoned base of sales and operational employees. This acquisition also gives us access to a new and significantly larger audience for our global energy service offerings, which are a growing focus of our business providing optimization solutions, engineering assessments and energy management tools to a growing population of companies and government entities seeking to maximize their energy efficiency and sustainability initiatives. This is a very exciting development for our company, one that we expect will significantly enhance our capabilities and portfolio of solutions allowing us to accelerate our ability to serve the needs of our growing customer base.

Now I'll turn the floor over to Brian to discuss the financial details of this acquisition.

Turning to Slide 7. As Kevin has outlined, this is a strategically significant acquisition for Hudson, one which we've been pursuing for some time and we're very excited to discuss the financial benefits.

On a trailing basis, the combined revenue of the companies is approximately $250 million. As Kevin mentioned earlier, because the deal has not closed, we are limited on the amount of specifics we can provide about ARI's financials. That said, the combined business has an attractive margin profile with the consolidated pro forma gross margin consistent with our 30% target and consolidated operating margins expected to meet our current 20-plus percent performance. So the combined entities are positioned to drive considerable long-term earnings for our shareholders.

We expect this transaction to be accretive to earnings beginning 1 year following the close of the transaction solely due to the requirements of purchase price allocation that I will describe in a moment. Upon closing, we'll be required to allocate the purchase price among the assets acquired. Since inventory is a key component to the valuation of their business, we will have to adjust upwards the ARI cost basis of that inventory. The resulting step up of their inventory cost will represent the current fair market value of the inventory. As a result, this step-up will have downward pressure on future gross margins, primarily in 2018, as we sell their acquired inventory. Consequently, the purchased ARI inventory will have a higher cost basis to our own inventory, which is why this effect is most likely isolated to 2018. Ultimately, this transaction supports our overall investment thesis of purchasing less intangible assets versus liquid assets such as inventory. Once the purchase price accounting adjustments examination has been completed by our independent auditors, we expect that the corresponding intangibles, including goodwill, will be approximately 25% of the total purchase price.

The acquisition price is $220 million and subject to post-closing adjustments. The acquisition will be financed in part with an enhanced asset-based lending facility of $150 million from PNC Bank and its new term loan of approximately $95 million, with GSO Capital Partners LP, a member of the Blackstone Group. No additional Hudson equity will be issued to finance this transaction. Post transaction, our total leverage ratio will be approximately 3x pro forma adjusted trailing month EBITDA. Given our strong profitability and expected growth going forward, this is reasonable leverage ratio. Hudson's acquisition of ARI has been approved unanimously by Hudson's board, and we expect the deal to close in 2017 subject to HSR approval and customary closing conditions.

I will now turn the call back over to Kevin.

Okay, turning in conclusion to Slide 8, our agreements to acquire ARI is an exciting and transformative development for our company. We look forward to welcoming ARI's employees to the Hudson family upon closing and deleveraging our strength and capabilities, expertise and reach to serve our existing and new customers with an expanded portfolio of products and comprehensive refrigerant services and represents another stepping stone to our long-term growth prospects.

We anticipate that this transaction will close later in '17. Until the deal closes, Hudson and ARI will continue to operate as 2 independent companies. With our expertise, long-standing relationships and leadership role in our industry and those of ARI, we believe the ongoing phaseout of R-22 and future phasedown of next generation HFCs continue to represent a significant growth opportunity for our company.

We believe we're uniquely positioned to help our customers navigate the evolving industry, which continues to introduce next-generation climate and ozone-friendly technologies and refrigerants and to capitalize on the large opportunity in front of us. We thank our existing employees and shareholders for their support and look forward to welcoming our new ARI colleagues to the Hudson family.

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

(Operator Instructions) Our first question comes from the line of Steve Dyer with Craig-Hallum.

Congratulations on the quarter and the acquisition, well done. I guess, I'll start first as it relates to the quarter, it seemed like sort of a perfect scenario with HCFC and HFC price increases pretty rapidly. You talked about a little bit of margin headwind in the back half of the year has also -- have leveled off. To what sort of magnitude are you -- should we look at? Are we kind of down in that mid-20s range, lower, just a ballpark as to how to think about that?

So in the second quarter, we achieved even higher margins, a lot of that came obviously from the situation with regards to HFCs. Right at -- we had entered this year suggesting margins would be in that, say, 28 to 30 range. We're probably now down to that bottom end of that range based on what's happening with the balance of the season. All these are really affecting the downward pricing on 22 and then now the significant downward pricing on the HFCs because it was a really big roller coaster up and now the roller coaster is coming down are really going to have a combined negative effect in the third quarter, but it shouldn't be taking it down to something below historical levels.

Got it. That's helpful. You've talked a little bit about substitutes, which is something we started to kind of hear late in the quarter, particularly as it relates to residential. How much if any sort of a threat do you feel like that is to sort of the reclamation pieces or the reclamation story kind of from here to 2019? Are there any sort of structural reasons why that won't be a big deal? Or how do you think about that? That's not something that I sort of recall when R-12 was being phased out?

So back to just the last part of that, the R12, there probably always was little blips here and there, but we've always said the substitutes with the old CFC phaseout were single digits. As it relates to the movement upward, it is slight really, with regards to substitutes this year. Not as severe or as great as we saw in that second quarter of 2013. So it's a slight blip up relative to where it might have been last season. It's probably a little bit above single digits, meaning like 10% to 15% as opposed to I think at 13%, it could have peaked to as much as 20% in that quarter. So it's a slight bump up, possibly was related to some of the sticker shock this season with the big increases early in the quarter -- early in the season, in the first quarter, but it doesn't look like it's sustaining into the third quarter now. So we'll continue to keep our eye on it and report on it.

Okay, great, and then just a couple quickly on the acquisition, and then I'll turn it over to somebody else. I guess, the 2 that I would have, just stating the HSR risk, I would think not, but I don't know if your people are telling you anything different. And then just basically you talked purchase accounting...

Steve, you're kind of breaking up. We can't quite hear your question, sorry.

Yes, you're cutting in and out there.

Is this better?

Yes.

So I guess just basically any HSR risk, Hart-Scott-Rodino in your view to the acquisition in the back half of the year and then just excluding the purchase accounting, would you expect it would be accretive right away, is that just kind of the only gating factor?

On the HSR, as far we are right now, we don't know of any, we don't expect. Again, it's a process and from what we understand from the antitrust attorneys that nothing is glaring right now so we expect we're not going to have a problem, but we can't guarantee any until it closes obviously.

And then as to the accretion question. That's -- you're correct, that's why we feel with the 12 months as we work out the inventory, then we'll have let's say, more normal purchasing and gross margin. We'll have this temporary unusual situation relative to how we allocate the purchase price that would affect the gross margin and then ultimately the positive impact on earnings per share.

Our next question comes from the line of Gerry Sweeney with Roth Capital.

Congratulations on the acquisition. I'm going to start with the acquisitions. One, I want to talk about maybe some of the assets or some of the benefits you're getting from it. And curious to how much reclaim activity ARI has and if -- and also how they go-to-market? Because increasing reclaim is one of the key components especially going forward into the next couple of years? So I want to see, one, how much they do? And two, do they have a different way of going to market and getting gas than you do?

First of all, and it's a difficult time right now in this period before we close. Obviously, we're limited on how much of that we can talk about. And so again we're going to have to avoid...

That's what I -- I respect that. I mean whatever, I understand that, sorry.

I mean, the one thing that I think we had said in the presentation is, we feel that these 2 businesses are complementary and that would also mean, in terms of customer base, would be complementary to each other, but we're very limited to how much we can describe currently.

Okay. So I mean, even on the particular assets not anything on the financial side?

Sorry, the question about asset, say that again.

I want to see what -- my next question was, obviously, just curious if on the HFC side, if they have the ability to do blending and different technologies like that in the HFCs, which would give you a benefit. I'm not sure if you can talk about some of the specific assets that they have or abilities. Can you comment on that?

Again, so if you look at, one of the things we like about the company is, we all come with different strikes for different areas, whether it's technology on one of our ends to distribution. And so very similar, but definitely some differences. 1 difference that we like is, they are ahead of us when it comes to HFCs. So we like that. So if you look at the 2 businesses, you might say, very, very similar. But those differences can be significant as we go down years from now where it will be, the whole market will be HFC. So they got a good jump. We already were doing very well and we like where they are going. So the 2 together work very well. So any one of these subjects that you can pick and blending to whatever, yes, they're very similar companies.

Okay. I'm going to try one more, and again, if you can't answer, I completely understand. But does this change your SG&A structure on a go-forward basis? You give an idea of the revenue they do and you kind of gave a general ballpark in terms of margins. But curious as to maybe if it changes Hudson's SG&A structure on a go-forward basis, in terms of people, et cetera.

Again, it might have been in the slide but there's a similar number of headcount in both organizations. There's a lot of similarities in just overall size. We have this anomaly with regards to the allocation of purchase price relative to inventory, but their ability to provide strong operating margins in that it ranges similar to what we've seen, it makes a lot of sense since the businesses are similar. But again, we have to be careful about how much we can disclose at this point in time. There's a lot of similarities.

I apologize, just trying to pry a little bit. And then, again, I want to just follow-up on the purchase price accounting. The way, and correct me if I'm wrong, the way I look at this, once you purchase your inventory, purchase accounting makes you value that inventory I suspect at today's value, which will essentially raise the value of that inventory then -- essentially. Then you're selling that so there's less of the difference between. It increases your cost of goods sold, at least on paper from that perspective, is that the way to look at it? And hence, the lack of accretion in the first year?

That's correct. Exactly, that's how it works.

(Operator Instructions) Our next question comes from the line of Sarkis Sherbetchyan with B. Riley.

This is [Ramon] jumping in for Sarkis for now. Firstly, congratulations on the great quarter and the acquisition. So I guess, my first question, I will touch on the acquisition a bit later. But firstly, can you talk about your expected economics from the DLA contracts? What's the run rate revenue do we expect from that contract for the rest of the year?

Well, again, it's really -- we just got started. I mean weeks. So it's just started and we'll have better information over really the next couple months, so we'll really give you an update when we announce our third quarter. Right now just bear with us, it's been only 2 weeks about it.

Okay, sure. And then when it comes to the acquisition, are you able to provide sales multiples or EBITDA multiples?

We have to basically stay away from any discussion about their particular financial results and performance and need to respect that. So we're avoiding anything other than discussing combined or consolidated revenues.

Our next question comes from the line of Steve Dyer of Craig-Hallum.

Just a couple of quick follow-ups. As it relates to the DoD contract, I think you had suggested last quarter that it would start late July timeframe. Are we on track for that as planned?

Yes, it just kicked in. It's only been a couple of weeks, we're just getting our feet wet with it right now. Things are going as we planned, but we'll have more facts as we go along since it's new to us. We planned for a while for this, so I think we have the right horses for this. I think we feel comfortable and confident in this, but we don't have any facts yet about volumes, where this goes, we just got going. So pretty excited about, but we'll share with you after the third quarter.

Great, and then just last question, I'm trying to comment (inaudible) something that's in the 8-K, it talks about a seller purchasing at a price of $21 a pound the greater of inventory, I don't know if you know what I'm talking about there. But could you clarify sort of what all that means?

In the document, there's several different price adjustments. All of this will be sorted out at closing and post-closing and so forth. So there's some price points in that document. But there'll be many different combinations to figure out what the net purchase price will be.

(Operator Instructions) Our next question comes from the line of [Craig Hogan] with [Anderson Hogan and Company].

I wanted to circle back for a minute to the question on the substitute gases in the market. You mentioned that you thought that (inaudible) diminished in the third quarter, I believe that's what you said. And my question is this, what do you perceive that drives the ebb and flow of that factor in the marketplace?

We're never entirely certain, we attributed, I think, we responded just a few moments ago, that possibly it was just simply sticker shock relative to the price of 22, which specifically to the fact that the price of 22 was increased fairly substantially in the first quarter of this year. So when the season starts, and let's just say, I think, you're in St. Louis, the April, May timeframe, that's when the contract that would really first see that high-price because we see these high prices earlier. The distribution chain are basically stocking their shelves but the consumption happens when the warm weather occurs. So it's possible it was just that sticker shock. It wasn't a big spike though like we said. It wasn't as big or anything comparable like we saw in the second quarter of '13. And it does seem like it's sort of receding currently in this third quarter.

Right. So that to say that you're -- and I understand you're saying, you're not sure about this. But if the price of R-22 moved up gradually but significantly the substitutes might not encroach as much as if it jumps up suddenly?

Well, we haven't seen it. It happened in 2013 for a short period because when the EPA came up with that rule temporarily and that was the shock and it was the same thing. The price was high and they thought there's plenty of supply. Next thing you know, substitutes came out cheap. Haven't seen anything and now this year comes along. People loaded up early. So there was a lot of people with higher priced inventory on their shelves and then the cool spring comes along. And now they can't move it out. So the same kind of dynamic again, and it seemed to get forced down to a lower cost gas, which was the replacements. People may necessarily love the replacements, but it was a cheaper gas, as we do think it was a sticker shock in the cool spring, that got that kicked. But again, in the past when that's happened, it rebounds comes right back up again. So yes, there's some belief that if it was a smoother rise in price rather than the jump that it did, the sticker shock probably wouldn't have happened and the cool spring would have happened but maybe that wouldn't have been enough.

And if you look back to 2016, that's really what did happen. We saw a lot of incremental price increases throughout this season. But when you looked at the price range from where it was in the beginning to the end, it did have a significant increase, but we really didn't see any significant movement in the substitute product question.

Our next question comes from the line of Gerry Sweeney with Roth Capital.

I promise I won't ask about the acquisition. But since -- I had a couple of questions. But since people were talking about substitutes becoming a little bit higher in part of the, I guess, the sales or greater portion. Are there any newer substitute blends on the market that are better drop ins, more efficient, easier to use that have come out more recently than some of the ones that -- some of the other replacements that came out a couple of years ago?

We don't -- I can't think if we know of anything specific that way, and we'd say probably the ones that we do hear out there that we thought were more were the ones that had been out for a while. So we haven't felt that there's a new name out there that that's taking part of market share and that's where it was going. It was just really the same products. And again, I don't think anybody claims they're as efficient or as good on performance as 22. Just a path they can use if it's -- if they're annoyed of the 22 price potentially.

Yes, I mean, that's what I heard, that some newer ones were out there. They were more efficient than some of the older ones but certainly less efficient than the R-22s. And as prices were up on the R-22, R-23 they will get a little bit more play just because of as you said sticker shock, but okay. How is and I got to preface this next question with, I know it's -- you like to look at it on a full year basis. However, since we're halfway to August or closing in halfway to August, how is reclaim activity progressing this year?

It's certainly up. It's still though early in the season to measure it and really frankly don't measure it. The amount of reclaim that comes in in August, in September and so forth is very significant, so...

It really is a quarter behind our refrigerant sales season.

Yes. I just wanted to -- I know 9 times out of 10 that's the way it usually progresses, but sometimes you do I know in the past on occasion it's come in at a little bit different time. So consistent with the past. And then the other thing is, there was a court ruling out of the D.C. circuit yesterday essentially striking down some of the regulation on the HFC side because I think the HFCs were promulgated under ozone damage and HFCs are more global warming and, et cetera, but is this just part of the legal process that we're going to have to sort of meander through until HFCs really start to be phased out? Any commentary on that?

Well, we're hoping from that, the next logical path and we were hoping the whole time it is going towards the ratification of the Montreal protocol. And that clearly from our end would be the best thing for our industry. And that's one thing we've been pushing. So what you're talking about wouldn't affect that, that was more from the snap rule but equipment. But for us we see the amendment of the Montreal protocol makes total sense for everyone. We think everyone's going to jump behind it. We think it's for a lot of reasons. But so we if anything, we're hoping it's going to get accelerated, the ratification of the Montreal protocol.

That court case had no bearing on whether or not the Montreal protocol could be ratified. It's the isolated court case.

Got it. So the Montréal protocol is sort of a standalone and this is a different avenue that was (inaudible) reading it. Got it.

Thank you. I'd like to turn the floor back to management for closing comments.

Great. I'd like to thank our employees, our longtime shareholders and those who recently joined us for their continued support. Thank you, everyone, for participating in today's conference call. We look forward to speaking with you after the third quarter results.

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