May 4, 2016
Executives
John Nesbit - 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 Partners David Mandell - William Blair & Company William Ostrand - Oppenheimer & Co. Craig Hoagland - Anderson Hoagland & Company Juan Molta - B.
Riley & Co.
Operator
Greetings and welcome to the Hudson Technologies' First Quarter 2016 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 pleasure to introduce your host Mr. John Nesbit of IMS.
Thank you. You may begin.
John Nesbit
Good evening and thank you for calling in. On the call today we have Kevin Zugibe, Hudson's Chairman and Chief Executive Officer and Brian Coleman, Hudson's President and Chief Operating Officer.
Kevin will review the Company's business operations and future growth strategies, and Brian will review the financials and immediately thereafter, we will take questions from our call participants. I’ll now take a moment to read the Safe Harbor statement.
During the course of this conference call, we will make certain forward-looking statements. All statements that address expectations, opinions, or predictions about the future are forward-looking statements.
Although they reflect our current expectations and are based on 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 actual results to differ materially. Okay.
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 of you had a chance to review our first quarter 2016 earnings release issued this afternoon.
We are encouraged by our strong start in the first quarter of 2016 which includes solid revenue growth, improved margins and increased profitability. Our revenue growth in the quarter resulted primarily from higher average pricing on certain refrigerants including R-22, as well as from increased sales volume of certain refrigerants.
As a remember during the 2015 selling season we saw some margin compressions relating to the pricing pressure from HFC based refrigerants, which are the replacement refrigerants for R-22 as well as with the older CFC refrigerants. And margin pressure began to ease toward the end of the third quarter of last year.
And at this point we don't expect to see similar compression this year. As a result and as anticipated gross margins improved during the first quarter and we expect to maintain gross margins in the mid-to-upper 20% range throughout the nine months 2016 selling season.
Our first quarter results reflect our long-term belief and strategy that as the industry advances toward the final phase-out of R-22 and begins to adopt initiatives to phase-out the next generation HFC’s. Hudson should continue to see revenue growth and increased profitability.
R-22, which is an HCFC currently remains the most widely used refrigerant and during the first quarter we saw continued incremental price increases. While we are in the early stages of the 2016, sale season currently we are seeing R-22 priced at approximately $12 per pound and prices are beginning again to move slightly higher.
With the phase-out of R-22 progressing the industry has been transitioning to HFC’s as the primary replacements of CFC’s and HCFC’s. As a result usage of the next generation HFC’s in the aftermarket is increasing at a double-digit growth rate as a result of both new construction and the R-22 replacement markets, which all use HFC refrigerants.
Going forward we expect that HFC’s will continue to be a volume growth area for our business. While it's still early in the repair and maintenance season, we are expecting further growth in reclamation.
Not just with the industry adjust to the ongoing R-22 phase-out, but also related to the expected phase-out of the next generation HFC base refrigerants. HFC’s have high global warming potential and as such are drawing increased concern from the worldwide community.
Currently we reclaim all HFC’s and we believe they represent an even larger reclamation opportunity beyond the R-22 phase-out. At the end of 2015 significant initiatives targeting the reduction of HFC’s came out of the annual meeting of the parties of the Montreal Protocol and also from the UN Conference on Climate Change.
We are encouraged by these developments and are committed to doing our part to limit the emission of greenhouse gases by highlighting the environmental benefits of using reclaim refrigerants to our customers. Our reclamation business represents an important growth opportunity and we are continuing to work with existing and perspective customers to promote our capabilities in meeting demand for R-22 as virgin production of R-22 is methodically reduced and ultimately eliminated by the end of 2019.
We are also ensuring that our customers understand that our reclamation capabilities also apply to HFC’s. As the leading reclaimer in the marketplace, with state-of-the-art reclamation facilities and extensive geographic reach, these phase-outs represent a significant opportunity for our business.
As most of you know integrating the service side of our business has proven to be very important to our total value add. Recently we announced the multi-year results of our web-based Chiller Plant optimization package called SmartEnergy OPS for one of our customers.
Not only did this offering provide significant energy savings and allow for greater capacity from the existing infrastructure, it identified actions necessary to prevent a possibly costly failure and an implant shutdown as well which would cost about $33,000 in unplanned expenditures. Similarly as documented in a recent case study, SmartEnergy OPS saved 25% on the annual energy spent for a large transportation equipment manufacturer.
The success realized with our SmartEnergy OPS provides long-term annuity revenues and a more aligned partnership with our customers. We believe our longevity is the leader in the industry.
Our established relationships, our ability to reclaim all refrigerants in our robust distribution network are unique elements of our business that will drive continued revenue growth and profitability. Our experience with the past phase-out of CFCs and with the ongoing phase-out of R-22 has helped us develop a reclamation model that we believe will enable us to capitalize on future phase-out of replacement gases as they occur.
With that, I will hand it over to Brian to provide our detailed financial results.
Brian Coleman
Thank you, Kevin. Revenues for the first quarter increased 27% to $28.2 million as compared to $22.1 million in the first quarter of 2015.
The revenue increase was primarily driven by an increase in the price per pound and volumes of certain refrigerants. Gross margin increased to 27% as compared to 25% in the same quarter last year.
As expected margin pressure from HFC’s that was a factor during the 2015 selling season is easing and we don't expect to see a similar drag on margins during the 2016 sales season. Operating expenses for the first quarter were $2.5 million compared to $2.3 million in the previous year quarter.
The increase is primarily attributable to expenses associated with our advertising, payroll, and professional fees. Net income for the quarter increased to $2.9 million or $0.09 per basic and fully diluted share compared to net income of $1.9 million or $0.06 for basic and fully diluted share in the first quarter of 2015.
Our balance sheet remains strong. As of March 31 2016, the Company had $55 million in inventory, down from $62 million at December 31, 2015.
Our inventory levels typically declined during our sales season then tend to increase towards the end of the season. At the end of the quarter, we had $10 million of availability under our credit facility and approximately $43 million in working capital.
I’ll now turn the call back over to Kevin.
Kevin Zugibe
We are encouraged by the market dynamics we've seen during the first quarter of the 2016 selling season. While the R-22 phase-out represents a tremendous opportunity for our business.
We are also seeing a great deal of support for the timely and efficient phase-out of the next generation HFC’s and a growing interest in our service business. We are optimistic that increased environmental concern will establish a clear path to additional phase-out, which will in turn drive the adoption of reclamation across all classes of refrigerants.
With our proprietary technology, longstanding industry relationships, improving distribution network we believe we are well positioned to meet the needs of our customers and to adapt to ongoing changes within our industry. Operator, we’ll now open the call for questions.
Operator
Thank you. Ladies and gentlemen, we will now be conducting our question-and-answer session.
[Operator Instructions] Our first question comes from the line of Steve Dyer from Craig-Hallum. Please go ahead.
Greg Palm
Hi, this is Greg Palm on for Steve today. Congrats on the good results.
Kevin Zugibe
Thanks, Greg.
Greg Palm
I’m not sure if you're willing to breakout volume growth versus pricing in the quarter, but based on my math that would seem like volume growth came in better than sort of your 10% growth target. Can you confirm that and then directionally is that still a good benchmark for the year?
Kevin Zugibe
The growth this quarter was in that range of 10% to 12% on volume, so we got a benefit from that, but we also got a similar benefit from price. So approximately it’s not exactly precise, but approximately 50% of the benefit this quarter compared to last year is price related and another approximate 50% is based on volume.
Greg Palm
Okay. And then sort of directional is that still kind of a good benchmark for the year?
Kevin Zugibe
It's difficult to say, but that's always our target is to look for volume growth in that 10% to 12% range.
Greg Palm
Okay. And in terms of reclamation maybe you can go in a little bit more details about that kind of what your expectations are for that.
What sort of factors can help accelerate growth in that segment?
Kevin Zugibe
So we are expecting growth again this year as we saw growth last year. Right now, it’s very early in the reclamation season; the repairs to systems begin to ramp up starting now into June and then continue really late in the season and typically lag the refrigerant sale season by 30 to 60 days.
We feel that we have strategies in place to capture the growth, because we think the growth comes mostly from behavioral changes in that the contractors should now be rewarded or compensated for obeying the law and returning the gas where as maybe in the past again that was punitive, they were charged to return refrigerant.
Brian Coleman
Right, but as it becomes more evident that the 22 is being phased-out which - we always thought that it would never actually happen. There was going to be playing.
It’s pretty obvious out there there's not a 22 hanging around so once that became obvious to people the wholesaler started acting differently and I think people are believing reclamation is going to grow. So hence you're seeing, we saw significant growth last year in reclamation and we're expecting the same this season.
Greg Palm
And you are seeing some increase in reclamation on the HFC front as well is that right?
Kevin Zugibe
That is correct. It happens sort of for two reasons, one, HFC continue to grow every year in terms of percentages of the total market, because every new piece of equipment that goes out there is an HFC piece of equipment.
But now that we're beginning to let's say come off of lower prices that we've discussed in great detail last season and the prices are increasing. That allows the reclaimer to pay more money for - that used their dirty gas, so it's an opportunity also to see increases in that market.
Greg Palm
Okay, great. Last one just kind of a housekeeping question, pretty big jump in receivables I’m wondering if that's just a function of more sales weighted towards the end of the quarter if there is some else to read into there?
Thanks.
Kevin Zugibe
You are exactly right. The first quarter is always that type of a quarter where you’re not exactly sure when in the month.
The sales are going to occur and it’s just the weighting of the timing of when the sales occur to the quarter.
Greg Palm
Okay, thanks so much.
Operator
Thank you. Our next question comes from the line of Gerry Sweeney from ROTH Capital.
Please go ahead.
Gerry Sweeney
Good afternoon, guys. Thanks for taking my call.
Kevin Zugibe
Hi, Gerry.
Brian Coleman
Hi, Gerry.
Gerry Sweeney
Why don’t if you could talk a little bit about - we’ll call it the tone of the market, are you seeing steady buying this quarter or was there a little bit of an acceleration in buying and how that’s translating into overall price. You know exiting the quarter today.
Brian Coleman
The first quarter always for our industry is obviously it’s not in need, so it’s getting your shelves loaded, it’s getting that preseason buying. So it never shelves its whether that’s in March I mean in January or it’s in March, but some usually somewhere in that first quarter.
This was throughout the quarter, it wasn’t on January, wasn’t all at the end, but it’s a steady to a point, but again this isn’t used right now, which is loading shelves is mostly for your first quarter. We exited the quarter and consistently, again right into the second quarter pricing even it’s recently uptick a little so it wasn’t a - from a pricing jumped up and then we blow that inventory and then it kind of relax.
There wasn’t been a steady growth on prices, but a steady growth on volume throughout. Again, we have seen another years like this throughout the quarter.
We anticipated it jumping up in price, little pops and little pops and we're seeing it. So we actually just recently saw another one come up.
So into our second quarter just continues that steady.
Gerry Sweeney
Okay. And then there is a comment in the press release.
Just talking about the - you mentioned Q1 sees a pre-buying. Is this a - this is somewhat of a loaded question but is that a sort of - we saw normal pre-buy, we're expecting a strong quarter or is that a caller saying, we had a strong pre-buy and maybe the second quarter and may have pulled some product forward?
Kevin Zugibe
I don’t think we saw any product being pulled forward it is typical so the whole first quarter is pre-buy every year. It was normal year people we think are going down that exact path we've seen on most year’s second quarter.
Yes, we didn't think it was odd volume that was pulling from the second quarter.
Gerry Sweeney
Okay perfect. And then real quick on HFC’s.
Now it sounded like they bottom that end of the third quarter and they've been rising ever since I've gotten some channel checks, same - very similar comment. How do HFC’s today compared to this time last year.
I just want to get a sort of a directional markets to you know when the down trend started and sounds like when that - where they're coming back just more from a modeling standpoint?
Kevin Zugibe
We're probably at the same price levels we were at in the first quarter of last year, probably not higher but just add those levels. The decline last year was short of steady throughout the nine months season, so you could almost say that the succeeding month was lower than the previous month.
So really the headwind pressure was likely greatest in the second and third quarter on margins relative to really how it was in the first quarter of last year. So you could say we've rebounded now and we're back to price level similar to where we were in the first quarter of last year.
Gerry Sweeney
Okay. And I know the trade case probably hopefully gets finalized June, July of this year.
Is that still correct?
Kevin Zugibe
That is correct.
Gerry Sweeney
Great. Thank you.
I’ll jump back in line.
Kevin Zugibe
Thanks.
Operator
Thank you. Our next question comes from the line of David Mandell from William Blair.
Please go ahead.
David Mandell
Good afternoon guys. So did you - you don't think you saw any benefit in the quarter from more favorable weather?
Kevin Zugibe
Yes, I really don't think so. And this isn't usually the first quarter is not usually about weather.
Again it's getting ready for the season, season hasn't kicked in yet that starts definitely in the latter part of the second and definitely the third too. But it's really the - it's the first quarter is almost never about the weather.
David Mandell
Okay. And then are you seeing R-22 substitutes gain any traction in the market?
Kevin Zugibe
Well, at this point we’re not. Okay, so we don't see it yet.
And again you’d expect this 22 gets higher, it’s likely, we start to see them again. But again we still think it’s going to be a smaller piece of the market from an effect and then the other piece of that is the higher HFC prices get since all of the drop-ins are HSC’s that helps the situation to or again less likely to go to a higher priced profit.
So the drop-ins will come up, the prices HFC’s come up.
David Mandell
All right. Thanks for taking my questions.
Kevin Zugibe
Thanks.
Brian Coleman
Thank you.
Operator
Thank you. Our next question comes from the line of William Ostrand from Oppenheimer.
Please go ahead.
William Ostrand
Hey, Kevin.
Kevin Zugibe
Hey, how are you?
William Ostrand
Good. Hey, Brian.
Congratulations on another solid quarter. With respect to weather, can you add some color as to how like looking out of my window and of course net of the acquisitions you forecast recent Northeast unseasonal weather to affect your future benchmarks for Q2 reclamation.
Brian Coleman
How we always look at weather is we look for some amount of warm weather typically we’ve used expression three days close to 90 degree weather, because you go from a point where you just turn your system on and may not be working well or at all and for couple of nights you are annoyed and you spend the money to fix it. So when we talk about weather, generally we’re talking about warmer weather in the North and the Northeast, because that's really where the seasonal demand occurs.
And we're looking to see that warmer weather in late May, early June that's usually around the average time that kicks in. Some year’s it starts a little bit early, some year’s it starts later and the years that where it starts later are the ones that would have an effect primarily on the second quarter volumes, sometimes you catch that up in the third quarter, it’s difficult, that's what we always say it’s a nine-month season as opposed to try to pick one particular quarter within that nine-month period time.
William Ostrand
And regionally given your acquisitions, where do you see further opportunities?
Brian Coleman
I mean we covered the continental United States prior to the acquisition. The acquisition did give us some additional coverage in the West Coast or particularly in California.
We are seeing additions in California because of that. The area where it’s still very small, but we think is more longer term opportunity, is that also one of the acquisitions had operations in Puerto Rico and we think that in time that might be an opportunity for us not just to serve that local market, but to serve let’s say Latin America as a launching pad from that area.
William Ostrand
Correct. Like Brazil, Southern Florida exactly.
Sounds good, congratulations guys again and will see you soon.
Brian Coleman
You bet.
Operator
Thank you. [Operator Instructions] Our next question comes from the line of Craig Hoagland from Anderson Hoagland & Company.
Please go ahead.
Craig Hoagland
Hey, guys. I was just wondering if you could add a little detail to your comments on the potential for HFC’s to eventually be phased out.
If you think that something that the EPA would drive or how that might go?
Kevin Zugibe
So there is lots of different things happening today as we discuss a little bit probably last year or two. There's different state such as California looking to put forth some regulation.
The EPA is certainly beginning a process of regulation focusing on equipment use for the most part more so than the refrigerant itself. And there's a few other things happening, but then the big thing is the global discussion and the concept that the original Montreal Protocol which allowed the phase-out of the ODS which is the CFCs and then the R-22 would get amended to provide for global phase-down to a phase-out of HFCs.
We think with the activity that in the fall of last year, we're further along in that process that possibly this year when the parties get together which would be late fall. There may be some evidence, some concrete amendment possibly.
So we still think the best possible outcome is an amendment to the Montreal Protocol, but certainly for example State of California’s beginning to promulgate certain restrictions on HFC’s and we'll likely see something coming out of California shortly.
Craig Hoagland
Okay, thanks.
Operator
Thank you. Our next question comes from the line of Juan Molta from B.
Riley. Please go ahead.
Juan Molta
Hi, guys. Thank you for taking the question.
And questions about competition and what you're seeing, as we are seeing expecting reclamation to increase. If you're seeing any change in the way they approach buyback pricing or anything else and those people fight for market share and reclamation?
Kevin Zugibe
There's probably nothing unique, different, changing relative to competition, it's likely that it will be continue to be obviously strong competition amongst reclaimers. We can’t predict exactly what will happen with price in the future.
We've generally seen that the pricing for acquired use refrigerant is somewhere around 50% of the sale price, so far but it's very, very early in this year season, we're not seeing any particular changes there. So I don't know if there's any particular change or difference so far this year, but it's still very early in the reclamation season.
Juan Molta
Okay, perfect. And then just a follow-up here on prepared remarks when you mentioned that you achieved volume growth for the quarter.
Could you provide maybe a little more color there if that was your volume growth targeted for virgin, recommendation, R-22, HFC anything else?
Kevin Zugibe
When we talk about targeted volume growth, we're talking about specifically refrigerant sales and total volume and we've been targeting volume growth in that typical 10% to about 12% range, some year’s we've done better, a few years we hadn't achieved that targeted level. So when we talk about volume growth its product sales, refrigerant sales.
Juan Molta
Okay, thank you.
Operator
Thank you. Ladies and gentlemen we have no further questions in queue at this time.
I would like to turn the floor back over to management for closing comments.
Kevin Zugibe
Okay. I'd like to thank our employees, our long-term shareholders and those that 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 second quarter results. Thanks.
Operator
Thank you. Ladies and gentlemen, this does conclude our teleconference for today.
You may now disconnect your lines at this time. Thank you for your participation.
And have a wonderful day.