Aug 2, 2015
Executives
John Nesbett - Investor Relations Kevin Zugibe - Chairman and Chief Executive Officer Brian Coleman - President and Chief Operating Officer
Analysts
Ryan Merkel - William Blair Greg Palm - Craig-Hallum Capital Group Christian Thomas - Sidoti Gerry Sweeney - ROTH Capital
Operator
Greetings, and welcome to the Hudson Technologies’ Second Quarter 2015 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, Mr. John Nesbett of IMS.
Please go ahead sir.
John Nesbett
Good evening, and welcome to our conference call to discuss Hudson Technologies’ financial results for the 2015 second quarter. On the call 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 quick 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 of our businesses as we see them today, they are 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 other factors that could cause our actual results to differ materially. Okay.
With that, I will now turn the call over to Kevin Zugibe. Go ahead, Kevin.
Kevin Zugibe
Good evening and thank you for joining us. I hope all you had a chance to review our second quarter 2015 earnings release issued this afternoon.
We are very pleased to have continued the momentum that started with our first quarter performance by delivering record revenues and improved profitability for the second quarter. Our revenue growth came with slightly higher volumes than we ever historically see in the second quarter and also benefited from R-22 pricing as well contributions from our recent acquisitions.
This revenue growth contributed to our improved profitability for the quarter as most of you know, we usually experienced increased seasonal activity during the second quarter which is the heart of our nine month selling season followed by moderate volume in the third quarter and significant less in the fourth quarter. As we discussed last quarter, we are benefiting from the clarity provided by the EPA’s October final rule that established R-22 allowances for 2015 to 2018 and so it clearly defined annual step down schedule leading to the elimination of virgin R-22 production in 2020.
R-22 pricing has incrementally increased since the announcement of the final rule, but we estimate the pricing the up over 25% since October for the slight increase in the second quarter. Additionally, with the certainty provided by the final EPA rule our customers can more effectively plan for the elimination of virgin R-22 which we believe will encourage the adoption of R-22 reclamation as the primary source of supply.
Hudson is a leading reclaimer in the marketplace and with the completion of our acquisitions we’ve expanded our reclamation capacity and geographic reach. We believe our ability to reclaim all refrigerant is an important market opportunity that will drive our future revenue growth and profitability.
Turning to HFC refrigerants for a moment, the HFC class refrigerants are the replacement refrigerants for R-22 and CFC such as R-12. Currently, there are several different moving parts that are leading to restrictions on virgin HFC production due to the high global warming potential of these refrigerants.
We expect over the next few years, we will see the adoption of a uniform phase out of the production of these gases. Our R-22 reclamation model is seamlessly applicable to the reclamation of HFCs, so we believe we are well positioned to capitalize on this next seven larger industry transition.
A portion of our revenue growth this quarter can be attributed to the extended geographic reach and expanded customer base, our recent acquisitions provided. Looking forward the additional reclamation capacity that we gained will be a valuable benefit to us as we prepare for the expected increase in demand for reclaimed refrigents for R-22 as well as agencies.
We have consistently identified reclamation as a long term grow opportunity for our company, we believe we are picking critical steps to put us in a position to capitalize on these opportunities and to effectively execute this element of our business strategy. Our focus has always been and remains on fulfilling the needs of our existing customers while adding new customers and offerings.
We continue to look for new opportunities such as strategically expand our reclamation network so that we can meet anticipated increased demand for recovered and reclaimed refrigerants as our customers embrace that supply option. We also remain open to the possibility of additional strategic partnerships and complementary acquisitions to further fuel growth in our overall business.
With that, I will hand it over to Brian to provide our detailed financial results.
Brian Coleman
Thank you, Kevin. Revenues for the second quarter increased 70% to $28.6 million as compared to $16.9 million in the second quarter of 2014.
During the quarter, we saw a higher selling price of R-22 an increased sales, volume refrigerants as we well as revenue contribution to our recent acquisition, gross margin increase of 25% as compared to 13% in the same quarter last year. Gross margin were slightly below our expectations primarily due to lower sale prices on most of the HFC class refrigerant.
We believe that the trend of low margins on the HFC refrigerants will continue through the remainder of this sales season. Operating expenses for the second quarter were $2.5 million compared to $1.5 million in the previous year quarter.
The increase was primarily attributable to expenses associated with our acquisition which are on a run rate of approximately 550,000 in the quarter of which 150,000 is non cash amortization for those acquired assets. Moreover, we had approximately $300,000 higher in selling expenses associated with the increases in sales volume.
In addition, during the quarter there was approximately $100,000 of non-recurring charges. Net income for the quarter was $2.8 million or $0.09 per basic and $0.08 per fully diluted share, compared to net income of $300,000 or $0.01 basic and fully diluted share in the second quarter of 2014.
Our balance sheet remained strong. As of June 30, 2015, the company had $45 million in inventory and an increase from the $37 million at December 31, 2014.
The increase is primarily related to inventory acquired as part of the acquisition and an increase in the cost of refrigerants. At the end of the quarter, we had approximately had $19 million of availability under our credit facility and approximately $38 million in working capital.
I’ll now turn the call back over to Kevin.
Kevin Zugibe
We believe the long-term prospects for refrigerants and reclamation are trending positively, we are seeing more opportunities for our service offerings as well. Consequently, we believe our customer relationships, established distribution network and proprietary technology and equipment position us well.
We continue to grow our revenues for many years to come. Thank you for your interest in and support of our company.
Operator, we will now open the call to questions.
Operator
Thank you. We will now be conducting a question-and-answer session.
[Operator Instructions] In the interest of time, we do ask that you limit yourself to one question and a single follow-up. Again, please ask only one question and a single follow-up and one moment please while we poll for questions.
Our first question will come from Ryan Merkel of William Blair.
Ryan Merkel
Hi, guys. How are you?
Kevin Zugibe
Hello, Brian.
Brian Coleman
Hi, Brian.
Ryan Merkel
So, I wanted to start with gross margin, you mentioned it was little bit below you expectations, it was also below our expectations as well, but you said the reason was lower sale price of HFC, could you just talk about a little bit more and I am wondering how much is the price down for that?
Kevin Zugibe
At this point in time, we are probably at all time low sale prices across the board on those HFC class of refrigerants. For a number of years now we’ve seen declining sales prices but this year we are probably at the bottom and we have not seen as low prices that we are seeing today from a historical perspective, so it obviously had a negative impact on our overall gross profit margin.
Ryan Merkel
And so for all time low, it does not worse from here, is that how we should be thinking about it?
Kevin Zugibe
It’s difficult to say, I mean the actions that are causing these low prices are primarily the consequence of production – overseas production particularly in Asia. So it’s difficult to say monetarily how they might price product in the future, we think that back to the structurally for the season, we are going to continue to see these low prices, it doesn’t necessarily mean that it won’t see high prices in the future but at the moment from what we could see, we think this trend will continue through the third quarter.
Ryan Merkel
Okay. And then if I could on sales, could you just break out what was organic sales growth in the quarter if you take out the acquisition impact?
Kevin Zugibe
The acquisitions again in general are less than 10% of the total revenue, now we even said that last year before we saw the growth this year, as we are growing the business as we acquired of growing as well and a similar relative relationship and for the balance of this year probably that will continue to be under 10%. With that said, much of the growth or say 50% of the growth overall is coming on a volume basis and then price obviously helped as well, particularly the price in R-22
Ryan Merkel
Right, okay, I will get in line. Thanks.
Kevin Zugibe
Thank you.
Operator
Our next question will come from Steve Dyer of Craig-Hallum Capital Group.
Greg Palm
Hi, guys. This is Greg Palm on for Steve this afternoon.
Kevin Zugibe
Hello Brian.
Greg Palm
You know revenue was nicely higher than our expectations can you maybe help us understand what’s driving sort of the increased volumes on that?
Kevin Zugibe
On a comparative basis, using last year obviously as the base point, we are seeing more traditional buying in 2015 relative to 2014, even relative to 2013 and probably most of that rationale and outcome is confidence in certainty as opposed to lack of confidence and uncertainty that existed in 2013 and 2014 really as it’s related to the EPA rule making and so forth, to translate a little further that we are saying is historically we would have seen a fairly consistent strong first quarter, a stronger volume as well in the second quarter relative to the first and then a decline in the third quarter and then very little sales in the fourth quarter on a historical basis. Last year and in 2013, we saw more of a buy as need basis and we saw a lot of very, very high frequent small volume orders which would not normal.
So the year got kind of pieced together in a much different way not like historical trends, not like historical practices whereas 2015, it seems that people have gained confidence and feel little bit more certain about outcomes and pricing and so forth, so it’s more of a normal year but actually this second quarter was pretty strong possibly people buying ahead of anticipated price increases too.
Greg Palm
Just the fact that R-22 prices down here like not unchanged versus 2014, just trying to figure out the impact of the use of substitutes, I know we saw that a lot when R-22 prices was at sort of 14 or 15, but kind of what are you seeing in the market as it relates to that?
Kevin Zugibe
Again, we didn’t see the substitutes that dropped in, we didn’t see them until the price came into say the low, I don’t know more than $11 if I would say, something like that little more and then it appeared and again so we do know that at the right price again we may see them or would you probably which more actually counting on up to this point though even though we’ve seen say 25% price increase, we haven’t seen them again yet. So there is, I am not saying they are not out there but they are not say significant part of the market even enough for us to notice, so will they rear their head again on?
Sure they will if the prices get high enough, what price that is, I am not sure maybe it’s 12, 13 not sure but it’s going to be higher than where we are today.
Greg Palm
Okay. And last one, I will hope back in the queue.
Obviously volumes threaded quite a bit higher than the 10% to 12% that you guys usually talk about, how should we think about the second half of this year?
Brian Coleman
Right now, we are on a run-rate certainly to be higher than our historical growth rates, but this third quarter probably based on what we see right now based on what we said a few moments ago will be more traditional meaning volumes will decline and certainly be left than the second quarter and sometimes the third quarter volumes you know what’s in the first quarter, it’s only the close call on that front.
Greg Palm
Okay, thanks.
Operator
Next, we have a question from Christian Thomas of Sidoti.
Christian Thomas
Hi, guys. How are you?
Brian Coleman
Hi, Christian
Kevin Zugibe
Hello, Christian.
Christian Thomas
Two quick questions. I was wondering in terms of your purchasing practices what maybe we should look for in terms of what you are going to be doing at the, I mean more people are expecting like R-22 to appreciate it, that’s either going to be, maybe you are going to be a little aggressive or?
Kevin Zugibe
We try to fairly consistent in our methodologies and we try to be consistent in that whole purchasing inventory just before the next sales season, so traditionally as we exit the sales team and we begin more of a buying season and they are really what not be a material change in our processes. The only change as it comes down the path and we grew difference in our market is availability of gas which as we see in the marketplace and expect in the marketplaces as quantities get together out there again we are going –we have to be aggressive in looking for gas where again maybe in the past we didn’t have to look at, it’s hard to find the gas, price is always important but even if you find the gas we are expecting it to get tighter, so which would be the first precursor of the pricing coming up.
Christian Thomas
So that does that mean maybe kind of use example of copper increasing or individuals maybe start holding for better pricing from or claimers such as yourself and is something we need to kind of vary of or do you think it’s still [indiscernible].
Kevin Zugibe
I think where you are going with the, do we think there will be reporting activity and so if that’s the question, there probably always will be some degree of reporting but with specifics to R-22 that’s also the question. R-22 is very, very fragmented, it’s in probably at least in 80 million systems group today, so it’s all over the place and most of the systems are very small in size, so it’s not like any one system owner or any one system itself has lot of gas, so there will be all kinds of variations or behavior but at the end of the day the 22 market is very , very fragmented and probably the most fragmented refrigerant in use.
Christian Thomas
Okay, got it. Just one final question, circling back to the HFC part of [indiscernible] until on the U.S.
program without taking chance until I guess people are going to see some positive momentum in that direction, is that something kind of the be the main overhang on HFC pricing?
Kevin Zugibe
Could you restate the question, Christian?
Christian Thomas
My apologies, just regarding the HFC that you mentioned are all time low, with the dumping from China the investigation kind of the probe into that, do you think the market is actually going to maintain the current pricing until that overhang is effectively lifted, people are little more confident about more on the control.
Kevin Zugibe
The case you are referring to is a legal process, it probably will take 12 months, right now the comment we made earlier is specific to this particular sales season, we don’t expect to see any material changes through the remainder of the season which really means the next quarter, third quarter, so what may happen next year and how the case and if the case is resolved it could certainly have an impact on HFC prices going forward but that’s really a 2016 outcome.
Christian Thomas
Okay understood.
Operator
[Operator Instructions] And our next question will come from Gerry Sweeney of Roth Capital.
Gerry Sweeney
Good afternoon guys.
Kevin Zugibe
Hi Gerry.
Brian Coleman
Hello Gerry.
Gerry Sweeney
I apologize, I had to jump on and off, so I am not sure if this question was asked but you could say volumes were up in the quarter, I am curious how are reclaim volumes going, I know you’ve always talked about volumes accelerating more in its 2016, 2017 timeframe but any volume, reclaim volume increase in the quarter or any insight into that?
Brian Coleman
We saw reclaim volume this year for the first time growing back again, meaning it started showing its sign of growth but the bigger sign to us was really the psychology to marketing it so in our customer base taking it more seriously again that was always the thing we needed to see more of and so we volumes coming up, so it started that trend which was a good sign for us but also in our communication and the Street it’s obvious that people have taken R-22 more serious again, once again we always said that the psychology is probably the most important, people have to believe that they need to reclaim gas that there is going to be a supply shortage and I think it started with the EPA putting a rule out last year and it’s growing right. The word out there on the Street is growing that it’s obvious that’s why the prices never came back even this season and it’s growing stronger as there has been a slight little uptick in the quarter, so they go together, if prices coming up because people see there is going to be a shortage and with that the reclamation did start to come in now so we are not down the right path.
Gerry Sweeney
Okay. I mean, I am going to assume that you not going to wanted to any numbers around how much reclaim increase you are seeing?
Brian Coleman
One thing, sorry, Gerry.
Gerry Sweeney
No go ahead, you go ahead, sorry.
Brian Coleman
So one thing is the reclaim activity is actually slowest in the first half of the year, it really begins in earnest in typically late May maybe early June depending on weather condition and so the outcome this year, we actually think there is going to be more growth in the last half of the year than the beginning of the year because it’s back to like, Kevin it’s phycology, it’s momentum and so forth, so right now there is no definitely growth in both business and the acquired businesses but we think the growth is going is actually get stronger towards the end of the year.
Gerry Sweeney
Okay. Then one final question on the services side, how much of, how much growth have you seen on the services side, is that picking up, that have a meaningful impact in the what I will call the revenue outperformance for the quarter or was that all just refrigerant sales?
Brian Coleman
The services on a overall basis relative to last year actually down just a little bit, really no permitted outcomes or changes we’ve seen a greater number of smaller service opportunities than we historically have seen, so the opportunities is there, it’s just the revenues per activity were down a little bit, we don’t think that this is permanent at all, we think its temporary, we think it also might be somewhat of a shift, so right now we are slightly behind, where we feel we might with the services business but there is nothing material permitted with regard to that outcome.
Gerry Sweeney
Okay, that’s helpful. Thank you very much.
I appreciate it guys.
Brian Coleman
Thank you.
Operator
I am showing no further questions at this time, I would like to turn the floor back over to management for any closing remarks.
Kevin Zugibe
We would like to thank all of our employees, our long time shareholders, and those who have recently joined us for their continued support. Thank you, everyone, for participating in today’s conference call, and we look forward to speaking with you after the third quarter results.
Thank you.