Nov 4, 2015
Executives
John Nesbett - Investor Relations Kevin Zugibe - Chairman and Chief Executive Officer Brian Coleman - President and Chief Operating Officer
Analysts
Greg Palm - Craig-Hallum Capital Group Gerry Sweeney - ROTH Capital Christian Thomas - Sidoti David Mandell - William Blair Shawn Boyd - Netsmart Capital
Operator
Greetings, and welcome to the Hudson Technologies' Third 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.
Mr. Nesbett you may begin.
John Nesbett
Good evening, and welcome to our conference call to discuss Hudson Technologies' financial results for the 2015 third quarter. On the call today we have Kevin Zugibe, Hudson's Chairman and Chief Executive Officer and Brian Coleman, Hudson's President and Chief Operating Officer.
Kevin will review the company's business operations and future growth strategies, and Brian will review the financials and immediately thereafter, we will take questions from our call participants. Let's 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 the best view of the industry and 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. With that, I will now turn the call over to Kevin.
Go ahead, Kevin.
Kevin Zugibe
Good evening and thank you for joining us. I hope all you have had a chance to review our third quarter 2015 earnings release issued this afternoon.
We are pleased to have delivered strong revenue growth and increased profitability for the third quarter. Our revenue growth resulted from increased sales volume of refrigerants and higher average R-22 pricing as well as some contributions from our recent acquisitions when compared to last year.
Our performance is indicative of our long-term strategy that as the industry moves towards a final phase-out of R-22, Hudson should continue to see revenue growth and increased profitability. For 2015, refrigerant sales season was very strong for us this year with more than 15% volume growth.
During the quarter and throughout the refrigerant sales season we also worked through negative pricing dynamics for HFC refrigerants, which are the primary replacements for R-22 and other refrigerants. Each year HFCs represent an increasing segment of the refrigerant aftermarket as well as increased volume growth for Hudson.
We believe they present another longer term reclamation opportunity beyond the R-22 phase-out, an opportunity which has already gained significant momentum with initiatives from Washington and private industries to phase out the use of HFCs over time. That said HFCs have been experiencing pricing pressure with historically low sales prices and hence lower gross profits.
As we indicated in the second quarter this pricing trend continued through the third quarter and the entire 2015 sales season. However we believe we are currently at the lowest end of the range for HFC pricing and the negative gross margins impact is winding down.
Continuing with margins, during the season our service business saw a much more work performed but at lower average revenue per job completed, lowering our overall gross margin. We believe the situation is temporary and we expect our revenues per job to return to prior levels next year.
Consequently the HFC pricing and service sales combined to create a drag on our gross margin expectations this sales season, for we believe is temporary and do not expect they will have a similar negative impact on the gross margin in 2016. In the quarter we continued to see growth in the reclamation business and are continuing to work with existing and prospective customers promoting our reclamation capabilities and our ability to meet the demand for R-22 as production levels are methodically drawn down and eventually eliminated.
With the timelines for the R-22 phase out now set and through targeted education our customers can more effectively plan for the elimination of virgin R-22 production, 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 our recent acquisitions have expanded our reclamation capacity and geographic reach.
We have long believed that our ability to reclaim all refrigerants is a differentiator for our business that will drive our future revenue growth and profitability. Our technology enables us to also reclaim HFC refrigerants, the primary replacement refrigerants for R-22 and CFCs, which we also believe will be subject to production restrictions in response to concerns over their high global warming potential.
We expect over the next few years to see a uniform phase down on the production of these gases and we are poised to capitalize on this new transition opportunity using our R-22 reclamation model, which is seamlessly applicable to the reclamation of HFCs. Additionally, we believe the clear global warming benefits of using reclaimed HFCs as opposed to virgin, are for the first time being considered during the procurement of gas.
With that I will hand it over to Brian to provide our detailed financial results.
Brian Coleman
Thank you, Kevin. Revenues for the third quarter increased 42% to $21.7 million as compared to $15.3 million in the third quarter of 2014.
During the quarter, we saw a higher selling price of R-22, increased sales volume of refrigerants as well as revenue contribution from our recent acquisition. Gross margin increased to 20% as compared to 10% in the same quarter last year.
The third quarter gross margins were lower than we would have liked, due to a combination of lower pricing on the HFC refrigerants and lower revenues from our higher margin service business. We believe the negative pressure on gross margins from the HFC refrigerants and services are temporary and not likely to have a similar drag on margins during the 2016 sales season.
Operating expenses for the third quarter were $2.5 million compared to $1.6 million in the previous year quarter. The increase is primarily attributable to the excess associated with our acquisitions, which is more than a quarterly rate of approximately $550,000, of which $150,000 is non-cash amortization of the acquired assets.
Moreover, we had approximately $300,000 of additional professional fees and salaries, including approximately $50,000 of non-recurring charges associated with the acquisitions. Net income for the quarter was $1.1 million or $0.03 per basic and fully diluted share compared to a net loss of $100,000 or $0.00 per basic and fully diluted share in the third quarter of 2014.
Our balance sheet remains strong. As of September 30, 2015, the company had $49 million in inventory, an increase from $37 million at December 31, 2014.
The increase is primarily related to inventory acquired as part of the acquisitions and the increase in the cost to refrigerants. At the end of the quarter we had $40 million of availability under our credit facility and approximately [$20 million] in working capital.
As Kevin mentioned, and as most of you know, our fourth quarter is traditionally our lowest revenue quarter and it typically accounts for less than 10% of our overall annual sales for any given year. Moreover, last year our fourth quarter was unusually strong, due to pre-season refrigerant sales as a result of EPA's issuance of a final R-22 rule, which led to approximately 40% increase in revenues over a typical fourth quarter.
Consequently we expect that the 2015 fourth quarter revenues, will not reach the prior year's level and will be more in line with historical fourth quarter results. I will now turn the call back over to Kevin.
Kevin Zugibe
In closing, we are very excited about the broad based support for the ongoing and potential phase outs coming from Washington and private industry, which will help drive the adoption of reclamation across all classes of refrigerants. Hudson is in a unique position to effectively service our customers as this unfolds.
We believe our proprietary technology, long-standing industry relationships and proven distribution network, not only position us to meet the needs of our customers, but also give us the ability to adapt to ongoing transitions in our dynamic industry. 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 ask that you please limit yourself to one question and one follow-up. One moment please, while we poll for questions.
Our first question, will come from Steve Dyer from Craig-Hallum Capital Group. Please go ahead.
Greg Palm
Good afternoon, guys, it's Greg Palm on for Steve today. I was hoping you could address the gross margin weakness a little more.
Has HFC pricing gotten any worse since Q2? I mean you mentioned expectations being at the low end, does that mean that you expect a rebound going forward or just some stabilization?
Kevin Zugibe
It's possible pricing in the third quarter was a hair less than second quarter, but we have been very close. But as we are indicating in our prepared remarks, we believe we are at the bottom.
We can't be 100% certain, but it seems they have stabilized to a very low amount, which then gives us some optimism for next year in that it's less likely to have a drag in the 16th season because we are already starting at the bottom if you will. It's possible we could see improvements.
Certainly there is a fair trade case pending on this matter. So we are more optimistically not, relative to the HFCs next year.
Greg Palm
And then in terms of the longer term opportunity that you mentioned there for reclamation, year out, years out what sort of a timeline you guys you see there?
Kevin Zugibe
Could you repeat that again?
Greg Palm
So you obviously mentioned sort of the HFCs as a longer term opportunity for reclamation and was just curious sort of how do you guys look at the timeline there, whether that is a year out or years out?
Brian Coleman
It is getting to phase out the use of some HFCs, other regions of the United States are evaluating this in conjunction with Canada. There has also been strong advocacy to amend the [natural] protocol, which is the global treaty to phase out the ODS, which phases out R-22.
So there is lots of different moving parts on this. Also the private sector is examining that and as Kevin mentioned, is evaluating the environmental benefits of use of reclaim versus use of virgin products.
So it's not that this has been happening, a global amendment to the [natural] protocol probably is the most favored approach to phasing this out. It's unlikely it's going to happen this year although it could happen this year, but then the implementation would be a few years out.
But in some respects, we are still optimistic about HFC reclamation projects coming from the private sector without relying on regulation. We think there is a change effect because of the high global nature of these refrigerants.
Greg Palm
Thanks. I will hop back in the queue.
Operator
Our next question will come from Gerry Sweeney of ROTH Capital. Please go ahead.
Gerry Sweeney
Kevin and Brian, good afternoon, and thank you for taking my call. I want to focus a little bit on the reclaim volumes.
You said, I think volume or growth was up 15%. Is that specifically looking at reclaim volumes, is that portion of the business reclaim that is accelerating?
Brian Coleman
Yes. Definitely reclaim activity is accelerating.
We are seeing more returns. We continue to nip away at bringing on new customers, simply the wholesalers that had even poor programs or no programs.
We still expect more growth just from transitioning more and more people to offer reclaim. So reclaim volumes are definitely up this year.
We think there are still going to be continue to be strong returns in reclaim, but not at the tail end of the season we had for reclaim. It typically lags the refrigerants season by a few months.
Gerry Sweeney
I think you said on the last call, reclaim was actually more of a second half of the year function?
Kevin Zugibe
That is correct, yes.
Gerry Sweeney
I know we are in the midst of -- we are just starting winter, but as the "cooling season" starts probably like mid-January, late January. At what point do we start to get some indications from maybe some of the producers on pricing for 2016 season.
I think we have what 4 million pounds coming off mandatory decline in production going into 2016. Any type of data points that we can start looking at once that stuff is filtered out?
Kevin Zugibe
I'd say what we would have said for years and years, it's a little bit different right now. It's a little different on pricing than we have seen before.
So typically we would say is the season doesn't start pretty stable, spring or so in most areas of the country, but the pre-season buying starts early in the year, say January, February, March. In that first quarter, so people load their shelves in anticipation of it.
In that time, so say January timeframe we will see really markers out there from producers and all over the pricing should be. So therefore we would see out first clear sign of what pricing would be for next year.
But again, so rather than say that's a little big, it's been a bit different this year in the sense because of the EPA rules being out finally, because of the reaction in the market -- is the stocks that are being worn down or not. We have seen pricing came up in this year say for specifically R-22 all the way up to the end of the third quarter, which is and again you are not talking huge volumes by that point, but again nobody raises price in the third quarter on R-22 normally.
So we are then [held] different, people are gearing up as if they are getting ready for a bigger next year, hard pressed to say that for sure. We will know next year.
But again, normally I would say first quarter of January we will see what the producers are doing. But again it's acting a [hair] different in the sense people seem to be -- and again it's not saying that their stockpiles gone and we don't know where it is.
We can't see where it is. We just are seeing, they are getting a tightening out there on supply of R-22 and we are calling even and people are bringing the prices up in September, that's odd for our industry.
So what our best guess there is probably going to say they are going to come out and sometime in January you are going to see them lockdown twice and then it will start taper, coming up from there.
Gerry Sweeney
Then one quick one -- one more quick one if I may. I know there is an anti-dumping case, it started back June, it's out of Department of Commerce initiated investigation.
I think the [ITCD] is doing the investigation right now. I think we hear something early December.
Now I am a little rusty on my anti-dumping kind of duties, the legalities. But from what you understand, you think of a announcement in December is that the final type of announcement or is there is another step in the process of -- on the anti-dumping case?
Kevin Zugibe
There is definitely more steps, so each date is like a positive or negative vote. So it will be a vote coming up.
If it seems that the vote is positive then the case continues. It's very difficult to say when the last vote or the final proceeding will occur.
We always anticipated this to be at least around the 12 month process. So you are correct it started in June, so it probably won't finish until June of next year, but there will be a particular date that will be pass/fail coming up towards the end of this year.
Gerry Sweeney
That's helpful. I will go back and join the call out there.
That's very helpful. Thank you very much.
Operator
Our next question comes from Christian Thomas from Sidoti & Co. Please go ahead.
Christian Thomas
One quick question for you. Can you maybe provide a little more color on the opportunities for your servicing business and then also what you would have to do there as a company to really maximize that?
Kevin Zugibe
Well again, we are pretty -- actually -- although the margin, the revenues for service weren't where we were hoping they would be this year. All signings were good for us in that we haven't lost out on our target of this year for a lot of reasons.
The area that we got nicked a little this year will affect believe or not sometimes on sales season on refrigerants doesn't help our services sometimes, because the bigger systems in the country which are our client customers and the client systems we work on, the likelihood of them shutting those systems down with the workload they have doing has been harder and harder. They get pushed out month after month and they say we can't bring it down, we have too much load on this machine and when it cools down a little, well the season was long.
It definitely was a longer season we have seen. So a lot of these things got pushed off, where they pushed off just to a later month, so maybe till next season at the starting before they bring the systems back up, [I am] not sure.
So it wasn't a lost, we had actually more service jobs just lower revenues because the big jobs we would typically do on them, a lot of them -- our sales people were actually annoyed saying, they had a schedule, they had to push this off and push this off. We saw a lot of that.
So it wasn't a bad sign for us from interest drawn from our customers or opportunity for jobs, it was just really the weather actually worked against us here. Then on the whole energy services that came with the [R-side] there too, based on what the energy prices being the lowest they have been, actually was not the best thing for someone trying to sell energy optimization.
So again, it didn't kill us but it definitely impacted us from where we thought we would be and put things on hold, so people wanted to spend money on energy optimization during this time and we are surprised how much that affected us and we ended up bundling some of our services, to the latter part of this year. So now we are feeling pretty good going into next year, even if they did -- even if energy prices stayed down low, even if the interest wasn't as high because of the low cost.
We feel much better with the bundled services we are doing that we hadn't in the beginning of last -- beginning of this year. So we actually think our service will be a good year for next year and so it just was a couple of things came together there that hurt us this year.
Christian Thomas
Okay. So is there a possibility there may be an uptick in Q4 just due to pushback or the like, you mentioned or do you think most people are going to wait till next year?
Kevin Zugibe
It's hard to say. Well again we can't -- I don't want to guess on it right now.
It's possible because that's when service is pushed off for sure and a lot of things say in the Northern region here in this area that where the most units are were pushed off. So this fourth quarter will be first quarter next year hard to say.
We are not really sure yet.
Christian Thomas
Okay. Great.
Thank you guys.
Operator
Our next question comes from David Mandell from William Blair. Please go ahead.
David Mandell
Can you give some kind of indication what the gross margins for the reclamation business did sequentially with those under pressure and also where did those hold in?
Brian Coleman
The overall relationship and dynamics of 22 were pretty much as we predicted. So from a pricing point of view, sales pricing point of view we got a lot of small increases as opposed to big jumps throughout this season.
But the price getting to $10 a pound now and that was up from our last call, more the upper 9s to 10, now it's pretty much solid 10. The buying pattern and practices look fairly stable through the year, which was a good thing.
But towards the tail end we saw the CP book look at 22 as a value, as to bringing more of it back recognizing that the sales price has gone up. So incrementally the margin percentages end up getting back to the same place, the tons and tons of margin as a percentage is a little higher or little lower.
But on an overall basis the business is pretty much in line with historicals.
David Mandell
And then can I regarding gross margin going forward 4Q is kind of a washed quarter, but into next year what kind of starting base should we think of for gross margin heading into next year?
Brian Coleman
Well this year, let's just say the margins in the fourth quarter always tend to be low, because the volumes are low and so forth. Yes.
You could say that the base is where we are right now for nine months around 24%. So that's the starting point into next year.
We would then expect to see some improvement over that through the quarters.
David Mandell
Thanks for taking my questions.
Operator
[Operator Instructions] Our next question will come from Justin [indiscernible] from Pilant Investment Group. Please go ahead.
Unidentified Analyst
My question has kind of been touched on a little bit, but I just wanted to understand a couple of the moving parts that are out in your business. Was the impact from your lower HFC pricing in the third quarter, is that similar in magnitude to what happened in the second quarter or was it greater?
Kevin Zugibe
It probably had more of an influential effect in the third quarter as we were winding down the season. So like in the second quarter, it was a strong quarter with the business mix particularly R-22 and so forth.
So probably had a slightly more impact but also slightly more negative relative to the second quarter.
Unidentified Analyst
Okay. So in the first half of the year you are running gross margins around 25% and then obviously in the third quarter you are down 500 basis points or so off of that.
And I know you mentioned the HFC pricing and then you also mentioned the service business being a little bit strained during this quarter. Just by word of the magnitude, can you tell us how big a proportion the effect was to that during the quarter?
When was it -- just going more data as you see but there is definitely more data in the services business during this quarter?
Kevin Zugibe
Sure. Some way shape or form equal but the service business has the opportunity to drive growth profit dollars very quickly and higher margins very quickly because there is very little variable costs per job.
So ex more in revenue it generally turns out to be 100% gross profit dollars. So the service business really has a very -- even though small it has a pretty heavy impact to the gross margin.
Unidentified Analyst
So basically, I think what you are saying is and the previous caller asked [indiscernible] basis more than mid-20% gross margin that's assuming HFC pricing kind of stays where it is, upside from that would come from improved HFC pricing, is that right?
Kevin Zugibe
That's right. One of the callers asked earlier, what's the pricing dynamics going to be in the marketplace, no one could really correctly or fairly answer that right now.
In January we will definitely be getting a feel for that as we get into the balance of the first quarter we will definitely have a much stronger feel as to what's going to happen. Our gut tells us at this moment that there will be stronger R-22 pricing and we believe there will be stronger HFC pricing as well.
Unidentified Analyst
Perfect. Just trying to gauge the baseline for those comments.
Okay. Appreciate.
Thank you very much.
Operator
Our next question comes from [Shawn Boyd] from Netsmart Capital. Please go ahead.
Shawn Boyd
Thanks for taking the question. I just want to clear two things, first Brian, you mentioned earlier in terms of gross margin impact we will be going into 2016 with HFCs kind of at the bottom and therefore you don't see the gross margin impact next year.
I just want to understand, it seems like that's probably because you won't get any hit with this year, and Q3 anyway was higher cost inventory that still had to run through the P&L versus by next year that would not be the case. Am I looking at that correctly?
Brian Coleman
Yes, to some extent, yes. But the other side of the coin is, we have gone through a period of price declines and we are saying the price declines, let's say have stabilized or stopped and then we believe that there will be price improvement from where they are.
So we think there will -- that is -- the balance possibly -- or the lack of negative stimulus is because prices will be stable or better going forward.
Shawn Boyd
And then switching over to R-22, Kevin, you mentioned that September was a bit different this year in that or Q3 was a bit different in that prices continue to increase much steadily through Q3 and that normally does not happen. And that certainly makes sense, given everything that we have seen in the last year in this commodity.
My question would be is there -- it seems like going forward now you [have fared] the winter season but in general that should only accelerate as opposed to slowing to any degree or you have been staying the same. Is that the correct way to think about that?
Kevin Zugibe
Here is the thing, we haven't seen it -- as I was trying to get it out was we haven't seen that before because it's usually a dynamic in the industry that prices come up by the end of the second quarter. Third quarter we haven't really seen price increases, so this is odd that it was still, if anything, it could actually start losing ground sometime by third quarter.
Certainly in the fourth quarter we have seen lost ground before usually a better buying opportunity all of that being in force because of that. This year it didn't.
So third quarter was definitely higher priced than second quarter right to the end and going into fourth don't know if we had see it move clearly as like no volume is going to sell in the fourth quarter. So usually you need some volume to make price come up, but I can't imagine again from our vantage point for the same reason it was going up at the end of even a slower volume quarter which is the third, still going up, can't imagine it's going to retract in the fourth quarter.
So if anything if it holds its ground in the fourth quarter now is a base starting point for next year, that's a good sign for us. So that's only we can go by to say.
Again any other year I could have -- I wouldn't have been shocked if it backed up a little bit because now the use isn't there but the volume is and some people want to free up their shelves. We are not feeling that out there at all.
Doesn't feel weak at all, the R-22. Again volumes are way down because for now you are looking -- the winter time you are getting much bigger difference driving price up and from that end that's what we are seeing.
So I don't think it's going to come back fourth quarter like it may have in the past and that would be a good base for next year starting in -- I don't think it's going to come up in the fourth quarter.
Shawn Boyd
Okay. Thank you so much.
Operator
There are no further questions at this time. I would like to turn the floor back over to management for closing comments.
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 year end results.
Thank you.
Operator
This concludes today's teleconference. You may disconnect your lines at this time.
Thank you for your participation.