Q4 2012 HDSN Earnings Call

5/25/13
Hudson Technologies' CEO Discusses Q4 2012 Results - Earnings Call Transcript - Seeking Alpha
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Hudson Technologies' CEO Discusses Q4 2012 Results - Earnings Call Transcript

Executives John Nesbett Investor Relations-Institutional Marketing Services Kevin J. Zugibe Chairman and Chief Executive Officer Brian Coleman President and Chief Operating Officer Analysts Sean K. Hannan Needham & Co. LLC Greg P. Garner Singular Research Matthew Dodson JWest Arthur Winston Pilot Advisors Gunnar G. Hansen Sidoti & Co. LLC William Driscoll RMB Capital Management Michael Needleman Preservation Asset Management Shaun Noll Stirling Capital Management Hudson Technologies, Inc. (HDSN) Q4 2012 Earnings Conference Call February 28, 2013 10:00 AM ET Operator Greetings, and welcome to the Hudson Technologies Fourth Quarter and Year End 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, John Nesbett of IMS. Thank you, Mr. Nesbett. You may begin. John Nesbett Good morning, and welcome to our conference call to discuss Hudsons financial results for the 2012 fourth quarter and year end. On the call today we have Kevin Zugibe, Hudsons Chairman and Chief Executive Officer, and Brian Coleman, Hudsons President and Chief Operating Officer. Kevin will review the companys business operations and future growth strategies and Brian will review the financials. Immediately thereafter we will take questions from the call participants. Ill take a moment to read the Safe Harbor Statement. Statements contained herein, which are not historical facts, constitute forward-looking statements. Such forward-looking statements involve a number of known and unknown risks, uncertainties and other factors which may cause the actual results, performance and achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by
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such forward-looking statements. Such factors include, but are not limited to, changes in the markets for refrigerants including unfavorable market conditions adversely affecting the demand for, and the price of refrigerants; the Companys ability to source refrigerants; regulatory and economic factors; seasonality; competition; litigation; the nature of supplier or customer arrangements which become available to the Company in the future; adverse weather conditions; possible technological obsolescence of existing products and services; possible reduction in the carrying value of long-lived assets; estimates of the useful life of assets; potential environmental liability; customer concentration; the ability to obtain financing; risks associated with the Companys joint venture, which includes the ability of the parties to perform their obligations under the joint venture agreement, any delays or interruptions in bringing products or services to market, the timely availability of any requisite permits and authorizations from government entities and third parties as well as factors relating to doing business outside the United States, including changes in the laws, regulations, policies, and political, financial, and economic conditions, including inflation, interest, and currency exchange rates of the countries in which the joint venture may seek to conduct business; the Companys ability to successfully integrate any assets which requires third parties in to its operations; and other risks detailed in the Companys 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 this statement was made. Okay, with that done, Id now like to turn the call over to Kevin Zugibe. Go ahead, Kevin. Kevin J. Zugibe Good morning. I would like to thank everyone for joining us today. 2012 was in many ways a breakout year for our company. We saw significant positive changes in our market, and those changes have continued in 2013. For a long time, weve been preparing for an industry shift related to the phase out of R-22, and in 2012 this shift started to happen in earnest. Operationally, we enhanced our offerings to build upon our leadership position in the reclamation market. In short, this is a very busy and exciting time for all of us at the company. Revenues for the fourth quarter increased 26% to $4.9 million. As a reminder, our business is very seasonal and we will always refer to the refrigerant season as a nine-month season comprising the first three quarters of any calendar year. Our fourth quarter typically accounts for less than 10% of our overall annual revenues. From a full year standpoint, 2012 was a record year in every respect. The revenues for the year increased 27%, gross profit margins increased to 40% from 20% in 2011, and we reported earnings per share of $0.49 compared to $0.04 per fully diluted share in the previous year. Now that the EPA has begun to make significant reductions in the production of virgin R-22, our plans and strategies are beginning to gain momentum. With further reductions in the production of 2013 put in place by the EPAs recent extension of the 2012 No Action Assurance Letter, we have seen further price increases in R-22 resulting in increases to over $14 per pound, and we believe there will be additional increases. As of December 31, 2012, we believe we have built our inventory to support our customers needs for 2013. Additionally, we are providing incentives and innovative programs to our customers that encourage them to return more dirty R-22 as a way to help ensure that their future R-22 needs will be met. What does all this mean for Hudson? Well, increasing R-22 prices will drive profitability as we are able to sell gas at a higher price. Consequently in 2012, we saw substantially higher gross margins and given our relatively fixed costs, we reported $14.9 million in operating income compared to $2.5 million in the previous year. More importantly, increased pricing of R-22 is a necessary catalyst for the growth of the reclamation market. Higher prices mean distributors can pay more to incentivize contractors to return dirty gas. During the fourth quarter, we continued to expand our base of wholesalers through our Platinum Reclamation Program, and we saw increases in the amount of dirty gas returned to Hudson for reclamation. The move towards recovering dirty gas is a behavioral change that will grow in practice over time driven by economics, product offerings, and education. Our reclamation programs are designed to provide attractive economics for everyone within the distribution chain, as well as peace of mind that a customers needed supply is secure for the next year. We still have a long way to go, but we are confident that we will continue to see growth in the reclamation market
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with recovered refrigerants filling the supply gap that is created with the limitation and ultimate elimination of virgin R22 production. For many years, we have been building an infrastructure to harvest refrigerant from all levels of the refrigerant market. We believe this is a large advantage for Hudson. For the residential-light commercial systems, we have built what we believe is the countrys largest network of wholesaler locations for the collection of the gas that we service through our state-of-the-art, one-stop shop reclamation facilities, which provide reclamation, testing, cylinder refurbishment, separation across cross-contaminated refrigerants, and packaging. For the industrial commercial systems, we offer on-site services which utilize our patented and proprietary equipment and processes, ranging from on-site reclamation to system decontamination, to energy efficiency and optimization services. Our on-site services put us in an excellent position to procure contaminated refrigerants from and to sell clean refrigerant for use in the largest systems in the country. These services also help alleviate the commodity aspect of the product sales, which in turn strengthens our customer relationships. The scope and selection of our proprietary service offerings have enabled us to grow and expand the breadth of our product sales. To that end, in November, we made a small asset purchase from Efficiency Technologies of the proprietary EffTrack Chiller Efficiency Software and certain assets to support and complement our existing suite of Chiller Management and Efficiency Optimization products and service offerings. EffTrack is a web-based Chiller Management program that provides in-depth continual engineering analysis and immediate recommendations for correcting inefficiencies in Chiller systems. This software expands and diversifies our own proprietary and patented efficiency offerings by providing a solution that enables new and existing customers to monitor and improve chiller inefficiencies. We look forward to integrating this software into our current offering and promoting our Efficiency Services through our expanding distribution channels globally. We are pleased with the results we achieved in 2012. We believe that we are in a very good position to capitalize on the opportunities being presented as our marketplace changes and we look forward to a strong 2013. With that, Ill hand it over to Brian for our detailed financial results. Brian Coleman Thank you, Kevin. While revenues for the fourth quarter increased to $4.9 million as compared to $3.9 million in the fourth quarter of 2011, as Kevin noted, fourth quarter continues to be our seasonally lowest revenue quarter when compared to the first three quarters of the year. The increase in revenues was primarily related to an increase in the average price per pound of certain refrigerants, and an increase in our refrigerant side service revenues. For the quarter, net income, including a tax benefit of $4 million, was $3 million or $0.12 per basic and $0.11 per diluted share compared to a net loss of $723,000 or $0.03 per basic and diluted share in the fourth quarter of 2011. Due to losses in our developing years, we have a net operating loss carry forward, the benefit of which the company had not previously fully recognized. This recognition of deferred tax asset is a non-cash, non-recurring benefit. As of December 31, 2012, the company has now recognized 100% of its deferred tax asset. Moreover, in future years, the company will be permitted to utilize approximately $1.3 million of these carry forwards annually, and thereby reduce up to approximately $500,000 of its annual cash tax expense. Revenues for the year ended December 31, 2012 increased by 27% to $56.4 million as compared to revenues of $44.3 million in 2011. The increase in revenues was primarily related to an increase in the refrigerant revenues, and to a lesser extent increases in refrigerant-side service revenues. The increase in refrigerant revenues was due to an increase in the average price per pound of certain refrigerants, offset by a decrease in the number of pounds of certain refrigerants sold. Gross profit margins increased to 40% for 2012, as compared to 20% in 2011, primarily due to an increase in the price of R-22. Operating expenses during 2012 increased by $1.5 million, but on a percentage of sales basis decreased to $13.6 million from $13.9 million in 2011. For 2012, the company had total income tax expense of $1.4 million. This tax expense was a combination of federal and state income taxes of approximately $5.4 million, offset by the recognition of $4 million for the companys deferred tax assets.
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As previously noted, this recognition of the deferred tax asset is a non-cash, non-recurring benefit. The company reported net income of $12.8 million or $0.54 for basic and $0.49 per diluted share in 2012, compared to a net income of $1 million or $0.04 per basic and diluted share in the same period of 2011. Now turning to the balance sheet; as of December 31, the company had $40 million in inventory, which is carried at our costs. The company had working capital of $27.4 million compared to $12.5 million at the end of 2011. The increase in working capital is primarily due to net income for the period and the installation of the PNC credit facility in June of 2012. Following the close of the fourth quarter, we announced that we have amended our PNC credit facility increasing our maximum loan availability to $40 million from $27 million. This increased borrowing availability provides us with the enhanced flexibility to pursue our growth objectives. At this point Id like to turn the call back over to Kevin for some final thoughts. Kevin J. Zugibe In closing, 2012 was a very strong year for Hudson and the outlook for 2013 looks excellent given our positioning in the marketplace and the anticipated supply gap for R-22. Longer term, we know that virgin production of R-22 will end by December 31, 2019 and Hudson stands poised to benefit along the way and beyond as a resource for our expanding customer base. We also expect the eventual phase down or phase out of the current and future alternatives, such as HFC refrigerants, which are replacing R-22 and other HCFCs, which will further drive future earnings. Thank you for your interest in and support of our company. Operator, well now open the call for questions. Question-and-Answer Session Operator Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Sean Hannan with Needham and Company. Please proceed with your question. Sean K. Hannan Needham & Co. LLC Yes. Good morning. Kevin J. Zugibe Good morning. Brian Coleman Good morning. Sean K. Hannan Needham & Co. LLC So question in terms of the general marketplace right now, so when you think, Kevin and Brian, about the reduced version availability for 2013, and the overall supply of R-22 being really [natural] (ph) luxury for customers, something they need to be a little bit more diligent about. Could you see any changes in terms of market behavior that could shift some of the seasonality you have and perhaps with customers want to procure or address that a little bit earlier in the calendar year, or is that just not something that would really happen or that youd see yet? Kevin J. Zugibe Well, weve seen that depending on the year, lets say 2009, we saw a little change because of the economy, people not wanting to load up early, basically not wanting to tie their capital up. Then we saw it get back to previous levels again, but now as prices are getting higher youll see that affect how much they want to go and load their shelves. So we will see in the past, in other words, Ill give you an example, wed see two major seasons for R-22. Youd see it load up in the beginning, before the season, people would stock their shelves; theyd start moving it out. Then they
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would reload again as they need it more. Well, then as the [whether] (ph) the economy or the price on the refrigerant started affecting it, people would put the amount that they needed on the shelves or (indiscernible) wholesale location, but anywhere really, even at a mechanical location, large mechanical. So its really the price of the refrigerant and maybe the economy in the past, but more the price on the refrigerant, I think could have an effect on when people will load up and how long theyll go on refrigerant. And so thats the one effect we have seen, the spread out, first, second, or third quarter sales. Sean K. Hannan Needham & Co. LLC Thats very helpful. And then in terms of your views on your existing network with distributors, I realize the importance of providing availability and kind of secured availability, its a great value proposition for the distributors as they repitch that message, well can you provide any additional color around how you could perhaps -- well any additional color around your specific strategy and then tactically what youre doing to organically grow that network and what you can get out of that network would certainly be helpful. Kevin J. Zugibe Weve said for many years the relationship with the distributors in our eyes is very important. While in 2011 and prior years, it may not have been material since there was quite a lot of venting and little economics for R-22, but we felt the fact that we were building that network and continued to do so last year, and will probably do further growth in the network this year, that it would be the leverage of that network. So, the tactics now are talking to wholesalers in ways about their view on refrigerant, their view on reclamation, and how treating it not so much as a profit center, but as a chain relative to supply in the future and things like that we think are important, and certainly, as we mentioned even last year, a number of the wholesalers out there started to understand this dynamic that their days of being able to procure all of their needs from virgin gas are over. Were still going through that transition while were going from a phase down to a phase up, but eventually it will have to be met and served by 100% of reclaimed refrigerants. So, at the end of the day, I think this year will even be greater understanding and growth as it relates to that network because of some of the strategies we built for the last number of years. Sean K. Hannan Needham & Co. LLC Okay, thats helpful. The last question for me on the cost side, your OpEx was up over four percentage points in recent terms of December year-over-year compare. Ive realized its a little bit more difficult to look at that given its seasonally low revenue, so maybe a little deceiving, but can you elaborate for us on the SG&A front, the extent we could or should expect growth from current dollar levels in 2013 as the R-22 opportunity certainly gains a little bit more momentum? Thanks. Kevin J. Zugibe As it relates to this particular year, we absolutely embarked on some, you could say, non-recurring projects to evaluate our strategies, evaluate our marketing, and so forth and we definitely invested, as we typically do, invest in advance of any particular year, sometimes even a couple years out. So this particular year, starting in the third quarter into the fourth quarter, we embarked on several different projects reviewing certain marketing data, sitting down reviewing some of our patented technologies, and analyzing the ability to take some of those projects to market in 2013 and beyond. We did, in this particular year, incur more of those kinds of expenses than normal. It doesnt necessarily mean we wont in the future, but it is the kind of expense that for us historically had not been common or not that we normally would have spent a lot of dollars in this particular area. Sean K. Hannan Needham & Co. LLC Great, thank you so much for the color. Operator
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Thank you. Our next question comes from the line of Greg Garner with Singular Research. Please proceed with your question. Greg P. Garner Singular Research Yes, thank you. Gentlemen, just Im curious about what you might see with your relationship with distributors right now given the price has gone up. You mentioned, Kevin, $14 from about I guess was about $11 at the beginning of the year approximately. Has there been any change in the attitude of some distributors of recognizing or you really need to respond to this in a certain way or perhaps its just too early in the season for them to even have any change in the way they might function? Kevin J. Zugibe Weve seen throughout the year, last year, changes depending on the price, depending on how serious they took reclamation. Starting at the beginning of this year, again this continued. We feel the pricing its funny because again is it the price? Is it the worry of availability? We waffle on the two, which one is more important almost, because we have the most interest than weve ever seen from distributors. Our group that goes out more on the distributor and the wholesaler, and is coming back now saying again, these price increases will certainly help and theyll help drive more reclamation because again theyre taking it more serious. Again, is it because of the price necessarily that theyre worried about paying or is it the availability because they know its getting tighter? The price is an indicator to them that its getting tighter. We like the response. They definitely even this year, once they saw the price increase come out after the No Action Assurance Letter. Its known in our industry that the prices are coming up, so it is we are going into this year with a different mindset than the distributors had, say last year. Greg P. Garner Singular Research Okay. Any quantification on the amount of reclaimed gas youre receiving, if not even an absolute level a percentage change perhaps from the prior year? Brian Coleman Weve seen significant growth in how its coming back with the wholesalers and the like. What were waiting to see is the public information from the EPA. We should see that coming out early April. You never quite know when theyre going to publish it on an overall basis, but we are expecting that this year was a very, very strong year for reclamation, probably back to what Kevin just said, more importantly is where were starting this year in terms of interest and activity, took us, say, six to nine months of last years efforts. So, we are starting this year with already a significant population of wholesalers who have changed their behavior. Now, we want to see more do that and we think they will this year, and the interest level already is much starting this year than it was even last year. Greg P. Garner Singular Research Okay. Were all focusing here on when it is going to be happening this year with pricing and volumes and things, to help us understand, what brought us here a comment was mentioned about total volumes were lower last year than they were in the prior year, I am just wondering, how did that occur, is there any explanation behind that or was it really just not much of a change, it was just incrementally lower? Brian Coleman Its a tough thing again, for a lot of competitive reasons we obviously dont like breaking out certain volumes, and what a refrigerant in extent more negative than good income our way, but overall we try to explain it as much we could throughout the year, even the majority of the decline in volumes this year was from agencies mainly because of the pressure put on by Asian imports, so that was the main. Now at any particular quarter, any one time sale of 22 22 is not difficult to sell, its very vibrant market for 22. So we dont look at it like its we had more volume in 22, to be difficult. The question we say is, its very valuable, its very valuable for us as a company for the industry. So unless some one can help us, get more dirty gas then well avoid
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certain sales to certain people, so we definitely have much more disciplined approach. The 22 sales this year for 2012 and will be this year too than we had in previous years, its because of the value 22 and what we want to drive from it, so yes the 22 market is a strong market, and our goal is to get more gas because its not difficult to sell. In the HFC front, that whole match with the Asian gas coming in and how much negatively impacted us. We do see signs from first time, whats the stability in the HFC market so thats a good sign. So going into this year, we feel a lot better with the HFCs than we did last year but HCFC we couldnt feel better and we fee excellent now. Greg P. Garner Singular Research Well, HFC is not that I wouldnt think that would be that big of a contributor to your total revenue split. Kevin J. Zugibe Its growing and so HFC sales are growing, 410A is growing across our marketplace for us and last year was just a tougher year for our market as we had to slowly back out of that area because of the pricing going backwards in the marketplace because of the imports. So we like what were seeing on fixing it that way, but for R-22 when we keep talking volumes all throughout the year being down; we really mainly talking HFCs. Greg P. Garner Singular Research Okay, so its safe to assume that R-22 volumes were up last year and it certainly seems like they would be up this year too. Brian Coleman R-22 volumes were down slightly and mainly through the latter part of the year because of our disciplined approach. We werent selling like 2011 and all the other years before that, you had product, you sold it. I think we mentioned several times in the calls that in 2012 we started to change the sales behavior and became more and more disciplined with that throughout the year in that we werent selling R-22 into the marketplace, we were selling R-22 in the marketplace in conjunction with or in connection with reclamation. We were doing so with those individuals that were like early adopters towards change, meaning encouraging gas to come back, paying for gas to come back, stopping that behavior of charging people and so forth. That was a transition that had begun last year in the season, but we really stuck to our guns, if you will, particularly the latter part of last year. Greg P. Garner Singular Research Okay, thanks. It was good to hear that. Just one last question just about capacity for reclaiming, is there any issue do you think that might occur if reclamation went up 50% this year, might there be a need for any CapEx for the reclamation process or maybe steadying the ship with handle it; any commentary on that? Kevin J. Zugibe Comfortably adding a shift we can certainly double our capacity right there, so we could we have confident we have room to grow before well to do something, but again as Brian said before, we actually incur some costs in the third, mainly fourth quarter of last year, really analyzing this market of every path we should take to more growth, not organic growth, to what should we do to grow this thing in the future we want to know, we exactly possibly can, so we can pull the trigger when we need to and that might be one of the pieces of if volumes jump off the way we expect them to. What is the best way once we hit a point, were getting closer to our capacity. Greg P. Garner Singular Research Okay, great thank you. Operator Thank you. Our next question comes from the line of Matthew Dodson with JWest. Please proceed with your
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question. Matthew Dodson JWest You talked about a couple of non-recurring projects in your SG&A. Can you kind of give us an idea of a run rate we could expect in 2013 for your SG&A? Kevin J. Zugibe Right now, at the moment we havent budgeted to spend some of the dollars we did in professional fees last year in the fourth quarter particularly. Now, it doesnt mean at the end of the day that we might change our minds. So it is possible, that other than inflation pressures, youre going to see no growth or a slight decline in G&A, but at times what we do is we do evaluate where we are and determine do we want to spend dollars today for projects and strategies going forward and as a result that could change. We saw growth in the fourth quarter, as I said a few minutes ago, that lets say, you could argue at some level is nonrecurring, but to the extent that we wanted to go outside and spend more dollars for professional fees because were trying to evaluate some of our strategies than we would. Matthew Dodson JWest Got you. And then, youve done a really good job this year. It seems like youve taken advantage of buying R-22 supplies before the price increase has gone up. With your cash flow in 2013, are you guys going to still do that or are you going to invest your cash flow somewhere else? Kevin J. Zugibe Its a slightly difficult question to answer. Because were expecting to see price increases continue through the year, then we are expecting to say that were going to need to use more working capital to purchase product at higher prices. Now, if and when the point occurs that if prices dont go up, which could be for a few more years out, were still expecting price increases. At some point then, you might have available cash, but currently what we are expecting over the next few years is continued growth in pricing of R-22, which means were going to take the profits from any one given year and sort of reinvest it back into inventory, which then also is the answer to why we increased our credit facility. We have a credit facility which is a very basic working capital line that helps support inventory buys outside of the sales season. Were always typically trying to purchase product before the sales season and then sell the product through that season. So its not an easy question to answer, because ultimately the big question is what is going to happen with prices. Matthew Dodson JWest Gotcha. And my last question for you would be you talked about a lot of more interest in your reclamation process. Do you expect 2013 to be the tipping point of where you sell more volumes that are reclaimed than actually the virgin supply, or is that more of a 2014 timeframe? Kevin J. Zugibe As we bring dirty gas into the company, typically if you picture it, it would be heavier in the summer, end of summer, and thats really during the middle of the operation. By the time of contractor pulls it out, it comes through the system to us, and we take title to that gas, the plan is always we stack that gas, it goes into our inventory at cost and then we have that available for the following year. Could we clean it and sell it the same year? We could, but we normally prep for the year, our volumes ahead of time for what we believe that we would satisfy our customers and put us in a good position, and because of the timeframe of when the dirty gas comes in, which is usually really, its not in the beginning of the summer, its the end, the heavier volumes, that will go for the following year. Matthew Dodson JWest
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Gotcha. Perfect. Congratulations on a great quarter and good luck with this year. Kevin J. Zugibe Thank you. Brian Coleman Thank you. Operator Thank you. Our next question is from Arthur Winston of Pilot Advisors. Arthur Winston Pilot Advisors Given the recent large increase in inventories, and the fact that the HFC, the cost, unit cost is down, is that is the strategy to accumulate as much inventory as possible in that because you think that the prices are going up? So if there is a chance to buy $5 million worth of inventory youd be very happy to do that? Brian Coleman Our strategy is to forecast out our customer needs and carry inventory accordingly. Our strategy isnt necessarily to speculate or go long or anything like that. So were always focused on our existing customers, focused on what customers might we be able to gain over a period of time, and then trying to make sure that we have a sufficient inventory. Ultimately the issue for us always is, its not us its the industry, it would be very, very difficult to operate an adjusted time model, because over 50% of the consumption really happens in lets say, June, July, August, somewhere in that three month window of time, so its very, very difficult to try to operate an adjusted time model. Arthur Winston Pilot Advisors Would it be fair to say that with the higher cost of much of your inventory that the physical amount of the inventory hasnt changed very much, its mainly the appreciation in price in terms of what youve got in your inventory? Brian Coleman Again, we dont get into some of this granularity, but if you could imagine, if you think about last year we saw prices increase and sort of a doubling, you would expect our inventory to go up substantially, but we dont break out the details of our inventory and how much is this and that and everything else. But you will expect, and should expect to see as we have further price increases, our inventory will go up. Arthur Winston Pilot Advisors Seasonally it will go up until the summer begins; just naturally it rises until that time? Brian Coleman Not necessarily, again, its all going to be about where first of all we have a controlled substance here, so we have 87% of the allowances are in the hands of three people, three large refrigerant producers. So at some level you have that dynamic, but you also have the dynamic of supply and demand, the natural dynamic of pricing and so forth. So its difficult to say how pricing will move because you would, as you just said, expect prices to increase through the season, but its possible to continue to increase throughout the season and into the beginning of the following year depending on what the three large allocation holders view in terms of pricing and so forth. And on top of in addition to that, when we bring inventory in it depends on what type gas were bringing in, what percentage of the gas we bring in is dirty gas, which will go into inventory, so that will be at a lower cost and that could be later in the year, it depends on the mix of what type gas it is and when it is. Arthur Winston Pilot Advisors Okay. One last question and thank you with the stabilization as you put it in the HFC from China, would you
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anticipate that your bottom line, from HFC from distributing this, would be no worse or even better in 2013 when the year ends compared to 2012? Kevin J. Zugibe Yes, we believe that. We were making good progress in HFC in 2012, back this up somewhat as it did the entire industry, and we feel were going to get back on that track again. Were actually happy with our margin, so yes. Arthur Winston Pilot Advisors Very good. Thank you very much for answering my questions. Kevin J. Zugibe Thank you. Operator Thank you. Our next question comes from the line of Gunnar Hansen with Sidoti & Company. Please proceed with your question. Gunnar G. Hansen Sidoti & Co. LLC Hey, guys. You talked about the importance of securing some more dirty gas. What are some of the incentive programs that you guys kind of have outstanding in order to kind of meet those needs? Kevin J. Zugibe Well, one is obviously price. Paying the best price, if you will, or near the best price relative to our wholesaler network, so that is very important, but the second important part of that is that the wholesalers share that with the contractors. And thats the part of the transitioning that started last year. I think we mentioned last year that for a number of months, wholesalers may not have been wholesalers were charging [sellers] and some even last year continued to charge throughout the whole year. Then at some point some wholesalers stop charging, but werent paying, but then we had some wholesalers starting to pay the contractor. The economics to the contractor that are very important too, that we get the contractor in the door, while hes in the door, returning dirty gas hopefully that stimulates additional sales for the wholesalers as well. And again different pieces of the market, right, so Brian was talking about, hes talking about more at the wholesale level, the residential-light commercial and then in whole other areas of the industry, our on-site services, and our service offerings, as we pair them together and create newer offerings together, we bundle things. So now, can we help them to get the gas more still with our services than we would have in the past where they didnt need the help? Yes, so we believe well get gas from a number of areas of the marketplace that we couldnt get before, because price stimulated it and now if we add other services, and there is a ton of other ones, availability of gas being one, price another one, but our on-site services sure help. Gunnar G. Hansen Sidoti & Co. LLC Great. Obviously it sounds like just with the pricing dynamics going forward, you guys will kind of look to kind of continue with some of those incentives and maybe even increase them given the future price increases, I guess, and the availability there? Kevin J. Zugibe Oh, yes, it was always the plan. As prices come up, I mean, it puts us in a better position to offer better incentives to them, whether thats price, whether its availability, whether its again, anything else we can do, but yes, price will continue to go up on the buy side. As the sales price comes up, always the plan, we want to incentivize and bring in as much as we can. Gunnar G. Hansen Sidoti & Co. LLC
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Okay, great. Thank you, guys. Kevin J. Zugibe Thanks. Operator Thank you. (Operator Instructions) Our next question comes from the line of William Driscoll with RMB Capital. Please proceed with your question. William Driscoll RMB Capital Management Good morning, gentlemen. I was just wondering if you could give us an update on the competitive landscape. Also, if you could touch on with that, how many EPA certified reclaimers there are out there now and whether you expect that to stay pretty constant? Thanks. Kevin J. Zugibe Yes, the competitive landscape has been very constant for a number of years. There is a couple of large ones and then there is approximately 30 small order managed local regionalized companies. There hasnt really been a change in the landscape in a while. Right now, we dont see or havent seen anyone beginning to come into this market. William Driscoll RMB Capital Management Okay. Do you know or have a sense of what percentage of your wholesalers have now switched off to actually paying the contractors for bringing in gas? Are we still very low in that penetration of people actually setting up positive economics for the contractors? Kevin J. Zugibe Last year, we used the expression sort of three groupings of people. We talked about one third approximately that were paying, one third werent charging, and then another third were charging. Were now at a point where far more people are beginning to pay than lets say, through the middle of last year, but as a percentage its difficult to quantify at the moment, because there is not a lot of activity. The reclamation activity is really going to start to pick up April, May, but then become more in earnest June, July, August, and then really continue through October. On your point, though, as we saw near the end of the year, and what we will expect to see, its moved over toward the paying part primarily, as Brian said, but then thats a variation too, so some are slightly paying, some are paying a good amount. So it depends on just paying doesnt necessarily get you there. So, we would always get questions from the EPA, everything as we said in Washington, hey, what level does it have to get to before the economics drives this thing? We used to guess on what it could be, but we never thought it was $1 a pound, say, we thought it was a bit more. It matters; its not just getting positive, its saying we think if someone pays, were going to pay more, we think theyre going to get more gas, so thats the bottom line. William Driscoll RMB Capital Management Okay, all right. Thank you. Kevin J. Zugibe Thanks. Operator Thank you. Our next question comes from the line of Michael Needleman with Preservation Asset Management. Please proceed with your question. Michael Needleman Preservation Asset Management
5/25/13
Good morning. Im not sure whether or not I heard the question that was asked earlier on inventory. You may or may not give out the total, and if you dont, could you just tell me or tell us pardon me, is the absolute pounds of inventory up or down versus last year? Kevin J. Zugibe We havent disclosed that information and this is more for competitive reasons. Were very cautious about talking about inventory, break down of inventory, price of inventory, margins associated with inventory and alike, because its likely that even as we speak there is competitors on the call that has been many times in the past. So were very cautious about all that and though we didnt provide that information. Michael Needleman Preservation Asset Management But if you dont give the absolute pounds and dollars, will you at least tell us whether or not the absolute inventory is up or down versus last year? Kevin J. Zugibe Well, youre now starting to get into, some presumptions are probably some people in the call right now presume our inventory is 22. Our inventory is not 22, our inventory is made up of quite a number of different refrigerants, theres probably at lease 20 different refrigerants being sold currently now certainly, R-22 will be the singe largest of them, but were not going to break out one refrigerant out of total pounds, its a very important and a very sensitive issue and very competitive. And again, no other competitor in our industry even provides the information we do. Michael Needleman Preservation Asset Management Okay, just one question. In addition to that, can you talk a little bit about your CapEx plans? I dont know whether or not youve mentioned that at the beginning of your call, I came on late. Did you give out your CapEx plans for 2013? Kevin J. Zugibe No, we didnt. Last year our CapEx were, lets say a little higher than normal; when I say normal, meaning relative to historical years. Historically, we would have been 700,000-ish give or take. Last year, we were over a million. Were probably going to continue to be at over a million run rate for some foreseeable future. Now, a lot of that extra, if you will, were towards different things relative to new opportunities, such as the asset acquisition on the software business that we had picked up in the fourth quarter of this year. So it is likely there will be normal expenditures to support development and growth of the reclamation operations, but there also probably will be other opportunities to acquire assets out there relative to support some of our service businesses as well. Michael Needleman Preservation Asset Management In terms of OpEx, you did talk about your OpEx up year-over-year, but on a percentage basis clearly, the revenue was down. Should we expect operational expenses to go up this year? Kevin J. Zugibe Operationally, back to the 2012 period, in 2012 we certainly had G&A expenses higher than normal and the main reason for that was we had special projects, if you will, that we incurred in the third and fourth quarter. Ultimately, you typically would have seen normal or nominal I should say inflation-type growth in G&A for us. However, this year you saw higher than that because of that. So, back to, were not in 2013 budgeting some of those projects that we did in 2012, so consequently you might see that G&A could go down. However, we have over the years looked at, and certainly will to the extent we think its prudent; spend extra dollars on projects to help support the growth and development of our revenues in subsequent years. So we didnt give specific guidance on the earlier question about that, but right now there isnt plans to repeat some of those expenditures that we made, particularly in the latter part of 2012. Michael Needleman Preservation Asset Management My last question is in terms of your infrastructure currently, as you kind of see the hub-and-spoke, if I could use that
5/25/13
terminology of your current infrastructure, do you believe that you are in need to possibly green field and/or buy additional operations wherever they might be in the U.S.? Kevin J. Zugibe In terms of growth, we think there is going to be very, very substantial growth organically. However, we could probably grow more and would grow more with certain important or strategic types of acquisitions. And as one of the earlier callers had mentioned, there are a lot of reclaimers out there still. There are also opportunities in some of the services business as we started to invest in the fourth quarter, so there is the possibility of growth that goes beyond organic. At this particular juncture today, speaking today, we havent executed anything material, but there is the possibility in the future that there would be. Michael Needleman Preservation Asset Management Last question is in terms, because a number of questions have been asked on the wholesaler side, because thats where the bulk of your gas is coming from, has there been any thought, in addition to the just outright costs or the dollar volume that theyre getting, to offer possible incentive plans to the wholesalers that youre working to accelerate the possibility of what theyre doing? Kevin J. Zugibe Well, as weve been saying several times now, we are and have been for what would be more than 12 months now, working with the wholesalers to accelerate that growth. Absolutely, and well continue to do that. Ultimately, the wholesalers should, impart, passing those benefits down to the contractors. Lastly, weve begun that change and that change started last year. Were already starting this year with that whole change behavior already having taken place. Again, part of the process is listening to the customer like we have for many, many years, and listening to what his pain points are, what can get him to move, so if you look at what our strengths are as a company, what the number of services we have, what our plans look like, as far as how many technologies we have, they all get designed almost always based on what the customer says, because we want a bundled approach to come to him. We dont want it to be just about price. We want to say, What are the things that are going to make his life easier? What is he worried about; is it volume, is it price, is it cross-contamination, is it moving of cylinders? So we keep adding things to say we are going to be that one-stop shop to make the offering where he is very successful going to his customers. So its not just price; it is a number of things that weve bundled. So our program, our plan and program what it looked like in January last year was a result of years of doing this, but by the end of 2012 it looked different, and it will look different in 2013. We keep adding things to it to incentivize them and make them drive this downwards. Michael Needleman Preservation Asset Management Thank you, gentlemen. Operator Thank you. Our next question comes from the line of Shaun Noll with Stirling Capital. Please proceed with your question. Shaun Noll Stirling Capital Management Hey guys, congratulations on the great quarter. Kevin J. Zugibe Thank you. Shaun Noll Stirling Capital Management
5/25/13
Im just trying to reconcile or strip out, I mean, R-22 prices are up considerably year-over-year, maybe double, and revenue is up 26%. I know R-22 isnt all of your revenue, but just trying to back into the recycling business its hard for me to see if thats really shown any sort of dramatic growth here. Is there anything you can add to that to try and clarify that because if I look at it this way, it just sort of sounds like recycling is maybe, I dont know, sort of not up a material amount. Kevin J. Zugibe Im not really sure how youre trying to grind up the numbers, per se. Ultimately, regardless, our revenues reflect pricing increases. Specifically pricing increases on R-22 drives, and has driven in 2012, whether that came from virgin supplies or reclaimed supplies Im not sure how you would be able to determine that. So its hard for me to understand exactly your mathematics, but what just to come back to things weve said before, what is going to happen, we believe is, as demonstrated last year, is youre going to have price increases first and then as price increases on R-22, and its irrelevant whether its reclaimed or virgin, they all meet the same standard, the same specs, there is no pricing differential, there is no labeling differential, its R-22. So price increases are going to occur first, and then youre going to see more return activity. As weve been talking all morning, thats whats happening and that started to happen last year. Shaun Noll Stirling Capital Management Okay, thats all from me. Thanks guys. Operator There are no further questions at this time. Id like to turn the floor back over to management for closing comments. Kevin J. Zugibe Great. Wed like to thank our employees for their dedication towards the success of the company. Wed also like to thank our long-term shareholders for their support and we welcome those of you who are new to the story. Were excited about the opportunities, I mean very excited actually, and we look forward to speaking with you after the close of the first quarter. Thank you. Operator This concludes todays teleconference. You may disconnect your lines at this time. Thank you for your participation. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS. If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you! Never miss a critical update on your stocks! Download the Free Seeking Alpha Portfolio App Now!
5/25/13
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Q4 2012 HDSN Earnings Call

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Hudson Technologies' CEO Discusses Q4 2012 Results - Earnings Call Transcript

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