Hudson Technologies, Inc. (HDSN) Q4 2017 Earnings Report, Transcript and Summary

Greetings, and welcome to the Hudson Technologies Fourth Quarter 2017 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Jennifer Belodeau. Thank you, Ms. Belodeau, you may begin.

Thank you, Tim. Good evening, and welcome to our conference call to discuss Hudson Technologies financial results for the 2017 fourth quarter and year-end. On the call today, we have Kevin Zugibe, Chairman and Chief Executive Officer; and Brian Coleman, President and Chief Operating Officer of Hudson. On the call this evening, management will review its fourth quarter results and year-end results and provide an overview of its combined operations, including its acquisition of Airgas-Refrigerants, which closed on October 10, 2017. I'll now take a moment to read the safe harbor statement. During the course of this conference call, we will make certain forward-looking statements. All statements that address expectations, opinions or predictions about the future are forward-looking statements. Although they reflect our current expectations and are based on our best view of the industry and of our business as we see them today, they're not guarantees of future performance. These statements involve a number of risks and assumptions, and since those elements can change, we would ask that you interpret them in that light. We urge you to review Hudson's Form 10-K and other SEC filings for a discussion of the principal risks and uncertainties that affect our performance and of the factors that could cause our actual results to differ materially. With that, I'll turn the call over to Kevin. Go ahead, Kevin.

Good evening, and thank you for joining us. Fourth quarter, as most of you know, is seasonally our slowest quarter. However, this year was an extremely active time period for us with the acquisition of Airgas-Refrigerants business. We finalized the acquisition at the beginning of the fourth quarter and have been focused on integrating the two companies and focusing our combined sales and operations. We've always had a lot of respect for Airgas-Refrigerants, which we subsequently named ASPEN, and strongly believe that it would be an excellent acquisition for us. Now that we're working together, it is increasingly apparent how well it fits with our business and how solid the organization is with great people and complementary products and services. The combination of our businesses is unquestionably a huge step forward for Hudson. We're now a much larger business, and this scale has multiple benefits for us. Our customer base has now grown to more than 7000. We now have approximately 2 million pounds of additional reclamation processing capacity, and we've grown our employee count to more than 250, including ASPEN's experienced leadership team, as well as a seasoned base of sales and operational employees. This acquisition strengthens our ability to meet the needs of our customers, both through refrigerant distribution as well as reclamation. It has brought a complementary product portfolio, a growing and diversified customer base, and significantly enhanced sales and distribution capabilities. The acquisition also gives us new presence further down the supply chain. Hudson has very strong relationships with HVAC supply houses, and this acquisition enhances that relationship by utilizing that ASPEN's very efficient order fulfillment systems as well as adding a channel directly to large end users. By having a stronger presence further down the supply chain, we will be able to better access dirty gas for reclamation. As we've often discussed, the ongoing phaseout of HCFC refrigerants and the expected future phaseout or phasedown of HFC refrigerants represent a tremendous growth opportunity for Hudson. Hudson has experience in managing the shift from one class of gas to the next. What is happening with the current phaseout of the HCFCs is similar to what happened with chlorofluorocarbons, or CFCs, and what is expected to happen with HFCs. Hudson is an industry leader when it comes to the development of best-in-class technology for the reclamation and recycling of all refrigerants. With the addition of ARI, we are well positioned to serve customers during the ongoing phaseout of HCFCs and to serve an expanded customer base during the future phasedown of HFCs. In the near term, we expect to benefit from ASPEN's higher volume of HFC sales as the industry shifts from R-22 to HFCs. On a long-term basis, we remain encouraged by the opportunities that R-22 will provide for many years to come. As we pointed out during our third quarter conference call towards the end of the 2017 cooling season, R-22 prices declined from their highs earlier in the year, and those declines were reflected in our third quarter results. In the fourth quarter, R-22 pricing remained in the $14 to $15 a pound range. As I mentioned, there is very little refrigerant sales activity during the fourth quarter, so pricing often remains relatively unchanged during this time period. As we look at the start of the 2018 selling season, the first quarter of 2018 buying pattern for 22, and for nearly all of HFCs, is on more of a just-in-time basis as opposed to typical pre-season inventory stocking in anticipation of the impending cooling season. We have seen this just-in-time buying pattern before such as the first quarter of 2009, 2010 and '14. As is currently the case with 2018, this just-in-time pattern typically follows a year of declines in refrigerant pricing during the cooling season, and thereby, large distributors and stocking locations choose to delay their purchases until the season actually begins to avoid the impact of potential price erosion. Hence, we expect first quarter 2018 consolidated revenue to be in the range of $44 million to $48 million, additionally, for the first quarter of 2018, non-GAAP adjusted earnings per share of approximately $0.01 to $0.02 per share. Importantly, we have always viewed the cooling season as a nine month season, and we expect the delayed purchases to ship volume into the second and third quarter and the full cooling season should reflect the expectations expressed in our third quarter earnings call. During our third quarter 2017 call last November, we indicated the consolidated Hudson and ASPEN results for year ending December 31, 2018, are expected to be similar to pro forma 2016 results. We also noted that we were expecting approximately $250 million in revenues for the 2018 period, which is slightly higher than the 2016 pro forma results due to the inclusion of the DLA contract in the 2018 period. Moreover, we expect that GAAP gross margins would adjust down to approximately 25% from the pro forma 2016 margins due to the pricing of R-22. Consequently, based on the pro forma data and adjusted for the items noted, we indicated that the resulting GAAP earnings per share for 2018 should be in the range of $0.27 to $0.30 a share. Adding back in tax effect an estimated $7 million of noncash amortization from the step up in inventory basis, which is similar to the full year 2017 amortization, the non-GAAP adjusted earnings per share should be in the range of $0.38 to $0.42. In fact, please refer to today's press release for more detail for non-GAAP measures. The soft first quarter has in no way changed our view of the 2018 cooling season. This year, only 9 million pounds of R-22 will be committed to be manufactured, and 2019 will be the last year of virgin production. While reclaim activity grew modestly at approximately 10% in 2017, we remain confident that it's the best -- that as the phaseout enters the final two years and virgin production goes to zero by 2020, we will benefit from the increased reclaim volume, as reclaim plays an increasingly critical role in this early transition for consumers. As this happens, the role of next-generation refrigerants HFCs will simultaneously increase as nearly all new equipment, including the equipment that's replacing R-22 units, runs on HFCs. We are very well positioned for this market opportunity, particularly with the acquisition of ASPEN. In addition to growing in terms of virgin gas volume, these HFCs have also been identified for a phasedown, presenting what we believe to be a significant long-term opportunity for Hudson since the install base of equipment using HFC refrigerants will be larger than for 22. We believe that the HFC reclamation opportunity has the potential to be larger than the current R-22 opportunity. At a macro level, there has been significant positive momentum for industry-related regulation of refrigerants as the Kigali Amendment to the Montreal Protocol continues to move towards ratification in the U.S. Just recently, a bipartisan group of U.S. senators introduced the American Innovation and Manufacturing Act, which would provide the EPA with express authority to phasedown of HFCs. There's no guarantee that it'll pass, but we are encouraged by the support it has received so far. I'll now turn the call over to Brian to review the financials. Go ahead, Brian.

Thank you, Kevin. For the year ended December 31, 2017, Hudson achieved record revenues of $140.4 million, a 33% increase compared to the $105.5 million in the comparable 2016 period. The increase is primarily related to higher selling prices of certain refrigerants, higher volumes of certain refrigerants sold and the inclusion of approximately $14.8 million of revenues from ASPEN Refrigerants, which was acquired on October 10, 2017. Gross margin was 27% for the full year 2017 compared to 29% for 2016. Net income for 2017 was $11.2 million or $0.27 per basic and $0.26 per diluted share compared to $10.6 million or 31% per basic and $0.30 per diluted share in 2016. We also provide non-GAAP information, which adds back various items, including the noncash amortization of the inventory step up, acquisition expenses and stock-based compensation. A detailed reconciliation of these items is presented in today's release. Non-GAAP adjusted net income for the year end was $20.2 million or $0.47 per diluted share compared to non-GAAP adjusted net income of $11.4 million or $0.32 per diluted share for 2016. Adjusted EBITDA was $27.2 million for the year ended December 31, 2017, as compared to adjusted EBITDA of $21.3 million for the full year 2016. For the quarter, we reported revenues of $24.6 million, an increase of 215% compared to $7.8 million in the comparable 2016 period. The fourth quarter included nearly a full quarter of consolidated revenues of $14.8 million from the company's acquisition of ARI. Gross margin in the fourth quarter of 2017 was 12% compared to gross margin of 13% during the fourth quarter of 2016. Net loss for the quarter was $5.2 million or $0.12 per basic and diluted share compared to a net loss of $1.9 million or $0.05 per basic and diluted share in the fourth quarter of 2016. Non-GAAP adjusted net loss for the fourth quarter was $2.3 million or $0.06 per share compared to non-GAAP adjusted net loss of $1.8 million or $0.05 for the fourth quarter of 2016. Adjusted EBITDA in the fourth quarter was a negative $1.7 million as compared to adjusted EBITDA of negative $2.2 million in the same period of 2016. A full reconciliation of our non-GAAP information can be found in our press release following the consolidated financial statements. On a pro forma basis, as if the acquisition had been completed at the beginning of 2016, we reported revenues for the 2017 year of $256 million compared to $240 million in 2016. Pro forma net income for 2017 was $23.4 million or $0.55 per diluted share compared to $17.1 million or $0.48 last year. The fourth quarter is seasonally our slowest quarter, so we see very little activity on which to base pricing data. This is the time of year when both volume and prices for refrigerants are the softest. Our balance sheet is strong, working capital of $113 million. Inventory at December 31 was $172.5 million. We do expect that during the 2018 and '19 sales season, we will see declines in overall inventory balances, and in the 2019 period, an increase in inventory turns as we begin to rely on a greater percentage of reclaimed product for R-22 for sale to serve the R-22 demand. This is a strong balance sheet that has flexibility and liquidity as we look to grow our business. Our total leverage ratio, as defined in the credit facility, was approximately 3x pro forma adjusted trailing 12 months EBITDA as of December 31, 2017. Based on the terms of our loan agreements, we expect that our long-term leverage ratio to be less than 2x pro forma adjusted trailing 12 months EBITDA. Given our strong profitability and expected growth going forward, we believe this is a reasonable leverage ratio. As of December 31, 2017, we have approximately $64 million of availability in our credit facility. We can also prepay $30 million of our term loan without penalty should we choose, which provides additional financial flexibility. We're heading into the selling season in a strong position to further enhance our balance sheet, and we have a strong foundation for our long-term growth. To echo what Kevin said earlier, the addition of ASPEN is strategically a significant change for Hudson, strengthening our offerings, our personnel and our geographic reach to fortify our leadership position in the refrigerant and reclamation industry. I will now turn the call back over to Kevin.

Thanks, Brian. Here at Hudson, the entire management group owns approximately 20% of the outstanding shares of the company and we all believe this is a very exciting and transformative time for our company. Hudson has delivered a five-year revenue compounded annual growth rate of 20% to achieve our position as a $140 million company for 2017 and are heading to become a $250 million company in 2018. As our industry continues to introduce next-generation climate and ozone-friendly technologies and refrigerants, Hudson will be there to meet their needs. Operator, we'll now open the call to questions.

[Operator Instructions]. Our first question comes from the line of Steve Dyer of Craig-Hallum.

With respect to 2018 guidance, what were you assuming for tax rate?

Approximately a 26% effective tax rate. We're still working on that and may get fine-tuned, but that's about the ballpark we're in right now.

Okay. So I guess, I'm just triangulating here based on the revenue guidance and the 25% GAAP guidance and the tax rate. It would imply a significantly lower by -- when I say significantly, I mean, is 3, 4, 5 points lower on operating margins than you'd indicated last quarter. I think you'd indicated a GAAP operating margin of 15 -- mid-teens, I think you said, plus $7 million to $10 million of add back. I get the $7 million to $10 million of add back, but I'm getting a number of more like 11% on the operating margins. So what sort of has happened with OpEx maybe from the last call that you weren't anticipating?

I'm not sure that there's anything particular or specific from the last call. Probably, again, as we were working through triangulating also with the pro forma numbers, we were using the expression mid-teens. I think you're correct in your calculation. You're probably closer to maybe 12%. I think you said 11%, but you're closer to that as opposed to possibly say, 15%. So I don't think there's anything particular or specific about the OpEx that's different. It's probably just fine tuning some of the information.

So does that change, I guess, the way we should think about next year and beyond, where the implication was that it would kind of take a step up to more like 30% gross, 20% operating?

Those are still achievable numbers. Though, once we get through some of the noise here, which is why we chose for the first time, I think, to disclose non-GAAP information, I think what we'll find is when we get into the '19 year, we're going to return toward those particular predetermined or pre-discussed goals.

But it seems like the increase in expenses is on the GAAP line, not the non-GAAP add backs. So presumably, there's something there you feel like can fall away as the year goes on into next year?

I'm not certain that's the case. The pro forma run rate, I believe, for operating expenses was approximately $30 million, and there's also some amortization in there. But that amortization from the acquisition is going to be there for all future periods, so I'm not certain exactly what you're looking at, Steve.

Okay, we can talk more about it offline. And then just quickly on inventory. You mentioned that you can rationalize some of that. What's sort of the right number there? In other words, how much of that can you turn into presumably cash here over the next quarter or two?

What should happen -- like historically, our inventory balance is lowest or lower at the end of June, second quarter. That should be the case again this year. You might see a greater decline going into the end of the second quarter compared to prior years. We may not be needing to reload inventory due to the fact that we acquired a lot of inventory in the acquisition, which is why a lot of the purchase price went to that inventory number, but we don't have a specific target dollar amount. I mean, one of the things that I think is going to be difficult for us to predict today, based on what we talked about the buying patterns, is how quickly are people going to try to purchase in the second quarter from, let's say, what they're doing right now in the just-in-time, that we want to make sure that we have adequate inventory to be able to meet that demand because we think it's going to come hard and fast each month in the second quarter, and frankly, probably continue into the third quarter, particularly July and August. Whereas we would have historically talked about the third quarter's volumes tailing off, let's say, at the end of July, that probably won't be the case this year based on how the beginning of the year started.

Okay, got it. Last one for me, and I'll hop back in the queue. Can you remind us the rate on the revolver that you're paying right now? And then just as you generate cash, is the preference to pay that down? Or how do you think about that?

Yes, historically, that's exactly what we've done. As we generate cash, we would apply it directly to the revolver. We do have the ability to apply up to $30 million to the term loan if we choose, so there's that option. The term loan interest rate is certainly higher. The blended effective rate is in the mid-fives, probably getting closer to six. Back to your -- specifically the revolver, I think the effective interest rate right now is a little over 3%.

Our next question comes from the line of Ryan Merkel of William Blair & Company.

So first, can you talk about the revenue assumptions you're making for 2018? What are you assuming for price and volume by product would be helpful? I think you talked about some of this on the last call, but just remind us again.

So currently, we're saying R-22 is in the $14 to $15 range. Assuming there's no movement in pricing of R-22, then that's where we're basing these revenue figures on. Now we do believe the price is going to go up this year. It's just that right now, based on the trend of where we were in the third quarter and where we are today and sort of our discussion about this in the third quarter earnings call back in November, we said to be conservative, let's assume there's a consistent pricing throughout the 2018 year. This would also, in a way, be in line back in the '14 year, when we had a price reduction in the '13 year that with the price for most of '14 remained constant. So assuming that's the same pattern for '18, those are what our expectations are relative to the price of 22.

All right, so essentially, volume's up, offset by price down, assuming it stays at $14, $15?

That's right.

All right. Is there anything else to be aware of in a year like this, where it's just just-in-time buying? Is there anything else just with margins or expenses?

Nothing unusual, let's say, with margins or expenses. Certainly, the relative ratio of, let's say, operating expenses should be the same, but the operating expense, particularly, let's say, on ASPEN's results, will be higher because their distribution costs or freight costs are generally a little bit higher. But the ratio or percentage to the gross margin should be the same. So there shouldn't be any particular expense that would cause that ratio to be different. Really, back to this pattern, as we've seen it probably at least 3 times before, is more that we have to be prepared on the inventory side in both the breadth of inventory, the locations of inventory because we're probably going to see a lot of consumption happening May, June, July, August. Whereas we may not have seen as much of that because a lot of shelves would've been stocked up in January, February and March.

Okay. All right. And then just lastly, have you spoken with some of your big customers? And have they confirmed that they're just being cautious with buying here in the first quarter due to just what happened with pricing last year? And is it their view that nothing's changed about the season as well?

Yes. I mean, probably all of our confidence in this comes from exactly that, is again, we talked to our biggest customers consistently, trying to find out what is the exact reason. So everything, I mean, consistent across the board, points toward they're just holding back until -- if you're in their position, last year was a bad move, right? They loaded up first quarter, prices came backward. They don't want that to happen again. They don't think it's going to happen, but I'll wait till I need it. So this is consistent across the board. So we feel very strong that it's going to be a good 22 volume year. It may not be a good first quarter, obviously, but volume over the nine month season, but our customers, consistently across the board, downstream, upstream, seem to be the exact same way. We'll be using a lot of 22 when demand kicks. So we have no reason to believe it's not that. When we say the line in the prepared remarks and when we answer them, there's a reason we say it and it has to do with our customer base and what they say.

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

When we look at ASPEN, can you give us a little detail? I mean, how much of their business is R-22 and how much of the business will say HFCs and other refrigerants? Is that possible?

Right now, the industry for HFCs, we believe, is at least 60%, let's say HFCs, and say, 40% 22. Now obviously, there's small amounts of CFCs that could affect that. So ASPEN's sales figures probably more correlate to the overall industry than, let's say, Hudson's because as we said, generally Hudson would likely have slightly higher legacy, which is, in this case, in this example, would be 22 than the rest of the industry. But on an overall basis, ASPEN should be closer to the industry averages and we might be a little bit heavier on the 22 versus the HFCs.

And I mean, my channel checks has been showing similar prices, around $15, and I wouldn't necessarily characterize it as just in time. It may be the same thing, but my checks are saying, Hey, people bought gas last year. It was closed. We didn't use that much. The channel's full. I'm not buying gas until we've restocked some of this inventory. So on that front, how much -- that's on the R-22 side, but then, I'm also hearing HFCs are selling pretty briskly. I mean, it's definitely a growth gas. How do your sales sort of rack up to some of those comments?

Well, our sales, as we've said, we feel are just in time. I'm not sure how that correlates to the way it's been described to you. But for us, it's just in time in that no one wants to take, let's say, a time risk. And based on what they did last year, by buying early and holding inventory and then selling in the season, they would have likely bought high early and then sold it a lower price later on. So back to this, what we're hearing is we just want to buy as we need it. We're not hearing folks indicate that they have inventory that they're sitting on or that they're not selling gas. They're just simply buying as they're selling it, basically, here in the first quarter. It's just that they're not stocking product as they might have last year and other years. Most years, we do have a pattern of preseason stocking, but we've seen this other pattern that we're seeing now this year, particularly because -- or in correlation to a year with declining prices has happened last year.

But Gerry, from our end, on the channel checks is -- it started the quarter, as the quarter goes along, that's what we're doing out there, too, exact same thing is the reason that they don't need the volume right now that they're still on inventory. And in other times of the year, that has been the case. But that hasn't been the answer -- or the predominant answer that we've heard. So the answer is -- and you may get some guys are sitting on a little -- what they always do, but in general, it's not that. We're going to wait. We're not sitting on it. We're not sure what's happening with pricing. Let's wait till we need it. And so we feel more confident that they're not sitting on a boat load. But that was our questions all through the quarter, so far, to make sure that, that's not the reason they're not buying.

Got it. And how are HFC sales going?

There really is the same mindset on the HFCs as there is with 22 or any other products. There's some products that you could see some little spikes. Sometimes for today, you could see a little spike, for example. But for the most part, it doesn't really matter if you're talking about 22 or 410a or any other HFCs. There was a lot of price spike increases and price declines. And even for the entire HFC class. I think you might remember there was the crazy shortages that we talked about that happened in the second quarter with very large price increases in HFCs, but very quickly in a matter of a couple of weeks, all that price increase declined back -- all the way back to pricing that you saw at the beginning of the 2017 season for HFCs. So those that bought in the second quarter likely sold that product at a loss or very little profit because of what happened with the pricing.

Got it. And then one more, and I'll just jump back in line. The DLA contract, how's that moving along? And not nearly as important now that you have ASPEN under your belt, but curious as to that business?

So for the DLA program, we'd probably say it's still in its infancy for us. Once we have this thing running efficiently, obviously, we'll focus on marketing and the growth phase of the business. But right now, we're still trying, as the base, just to get efficient in this. So a lot of changes from the old contract from -- that the DoD or the DLA is getting used to themselves and they're trying to work through inspections and all of those things, which can be hiccups. Somewhere on Hudson's side is we're trying to step up to say, Okay, the program's different. We have to do this. So it's going very well, but it's -- again, we're right now trying to build the base first before we jump into the growth phase of the business. So I'd say, probably for the fourth quarter, we did roughly $3.3 million in revenues, but we still believe we'll be doing over $15 million for the '18 year.

[Operator Instructions]. Our next question comes from the line of Sarkis Sherbetchyan of B. Riley FBR.

First question around the revenue distribution expectation for the acquired ASPEN business for fiscal '18. Can you help us understand if there's anything kind of different as far as the revenue cadence?

Are you asking is there seasonality, let's say, similar or identical to Hudson?

Yes, in part, that. I mean, obviously, it seems like their business is a little bit more stable, at least from the pro forma filings, relative to distribution of legacy Hudson. So just want to understand what your expectation is for fiscal '18, revenue distribution for the acquired business?

Well, we're pointing on the consolidated financial results. We're not going to be reporting on individual results. But if you're asking is there some sort of shifting between quarters of their business versus ours, the answer is yes. Not materially so, but their fourth quarter generally would be a stronger quarter compared to our fourth quarter because there are end users, people who are using refrigerants 24/7 that are buying, and they have more of those kinds of customers than we would typically have. Similarly, if this particular season was more of a pre-season stocking, our first quarter would generally be stronger than their first quarter because we would have more of, let's say, the supply houses or wholesaler customers than they might. Whereas the end users downstream really would not be pre-stocking refrigerants. So an overall basis, there's a slight difference here because the customer base is different, but it's the consolidated results that matter to us.

Understood. That's helpful. And if I step back and try to understand the gross margin profile of the acquired business, from the filings, it seemed like it was much richer than the legacy Hudson. So would you expect that, call it, 30% gross margin range for that piece of the business to continue? Or do you expect that to be better than that?

We'll probably expect it to be the same. But again, now that's, for us, not important. Let's say, I think what's important is the consolidated results, it's important to think about that on a consolidated GAAP basis, a target of about 25% blended. If you start to pull out all this non-GAAP stuff, then you'd probably pick up another three points on the gross margin percentage to, like say, 28% versus 25%. I think that's what's relevant. We don't expect there's any material differences in the customer base and the profitability performance on a consolidated basis versus the two businesses on a stand-alone basis.

Understood. And I think if I look at the guidance, the inventory amortization, that will run through the cost of goods section, would be about $7 million for fiscal '18, and then I think the balance of that was a total of $17 million. So you'd expect that to maybe come through in the fiscal '19 period? Is that the right way to think about it?

That's exactly right. So we weren't sure when we talked about this point probably in the third quarter with regards to the pro forma results. We were thinking maybe there might be more amortization in the '18 year, but it looks like it'll probably run at around $7 million. Ultimately, the whole purchase price accounting is still not completed. There's still a period of time of evaluation and assessment, but we think now the '18 year is going to be probably closer to $7 million, which then means, as you just said, the balance should roll out in the '19 year.

Our next question comes from the line of Chris Colvin of Breach Inlet Capital.

For the D&A, depreciation and amortization, excluding amort of the inventory step up, so the kind of ongoing D&A, I am I right that it looks like 2018, it's going to be about $7 million?

I think that is correct. What I could do is also confirm that. Part of, again, what the number exactly will be goes back to my prior comment. We still have adjustments that will be made to the purchase price, which then could affect the amortization amount.

Okay, and the reason I ask is myself, and I think probably a lot of folks on the call were -- thought the guidance was lower than expected, and what a lot of us care about is cash earnings. And I think part of the gap -- is your D&A -- at least the run rate D&A, looking at your fourth quarter, is like $7 million, but your CapEx is closer to $3 million. So I think that's part of the gap. The other part of the gap, which will be my second question, is the kind of cash SG&A. What are the synergy opportunities? I commend you all for being the only management team that has not promoted synergies after an acquisition, but I would expect that there would be some type of synergies at some level. So can you comment at all on potential synergies?

There may be synergies going forward. At the moment, we don't believe them to be material. If we felt that they were material, it's likely we would emphasize them to some extent. But the key for us right now is going through this transition period and the full integration period, and all that's going to continue through the second quarter. There's probably some amount of that in the third quarter as well, but most of the effort is happening as we speak and then probably continuing through the second quarter. At that point in time, it's likely we'll have a clearer picture. But at the moment, it's not anticipated that those synergies are going to be material.

Our next question comes from the line of Matt Sherwood of Cooper Creek.

Just had a quick one. So on the guidance, which implies essentially that revenue 2016 plus 2/3 of the DLA or whatever, just can you help me out? Shouldn't there be volume growth of your products, like between 2016 and 2018? Isn't that a big piece of your story? Or you're seeing that in light of the weak Q1 maybe just don't make it up for the season? Or you just shared a smaller guide? Just curious how you look at the volume growth of ASPEN.

So we are expecting volume growth, but I think we've discussed this in the past. All of that volume growth really comes in the form of HFCs. And the HFCs, as a class, let's say, the prices, again, have let's say, been depressed because of the crazy price increase and then the price decline -- the way we ended '17. We're right back where we were at the beginning of '17, back to '16 and '15 periods. So there really -- the volume growths are there, but the overall contribution isn't that significant, which then ends up with sort of less of an impact, let's say, on the pro forma results or the guidance.

Right -- no, I fully understand that. But let's say, HFC revenue is excluding the DLA is 25% of the pro forma business and volume grows 10% a year over two years. Even without compounding, that's 20% growth on 25% of the revenues. That's 5% growth. That's meaningful. So I was just curious like why you don't -- are R-22 volumes expected to be lower than '15? I'm just trying to bridge the gap.

We're not expecting that they're going to be lower than '16. They probably should -- but we're expecting them to grow, that's for sure. So again, back to the pounds that grow, the only pounds that grow are the HFC class, which again, are selling at a significant discount, let's say, to 22. 22, as we said, is in the $14 or $15 range. Whereas you see most of these HFCs something north of $3 a pound. So it's a significant difference on the sale price per pound for those products.

Right. No, what I'm trying to ask you is very simple. Your guidance implies basically if the deal is $15 million, right, and you had $240 million of sales roughly in 2016, and your guidance is for $250 million of sales, you're basically assuming that your sales will be $5 million less than they were in '16. But HFC volumes have grown for two years over that period, so even if pricing's the same in both commodities, you'd think revenue would be higher than '16, not $5 million lower. That's just what I'm trying to understand.

Well, typically, when we provide any financial information in terms of forecasting and so forth, we'll round down, not round up. So again, I'm not sure exactly what your mathematics are going to come out to, but we are expecting growth in HFCs. The prices, sales price of those products are certainly lower, as we just said, about the 22. You could certainly round your number up or you could round your number down. Generally, we round it down.

Right. So you're being conservative, and I guess, that makes full sense in the type of environment we're facing. I think you're doing the right thing. So it can be conservative, and hopefully, we can start reporting upside quarters in the coming year.

Our next question comes from the line of Peter Rabover of Artko Capital.

I was just curious whether -- may be asking the same question that everybody -- that asked in the other way. If you could talk about your cash EPS, I guess, or free cash flow conversion this year. Sounds like it's going to be a little bit more because of the inventory draw down. But longer term, what percentage of your EPS do you see is being cash EPS? Is it 100%, 80%? And maybe that's the best way to kind of get to start thinking about the difference between the EPS versus the GAAP numbers and the non-GAAP numbers.

Yes, probably, it wouldn't be 100% but probably 80% going forward.

Okay. And do you guys have an expectation of what your, I guess, operating cash flow is going to be this year?

Not at this time. We certainly could spend more time with our disclosures on cash versus noncash going forward than we -- let's say, than what we prepared for today.

There are no further questions over the audio portion of the conference. I would now like to turn the conference back over to management for closing remarks.

I'd like to thank our employees, our long-time shareholders and those that recently joined us for their continued support. Thanks, everyone, for participating in today's conference call, and we look forward to speaking with you after the first quarter results. Thanks.

This includes today's conference. Thank you for your participation. You may disconnect your lines at this time. Have a wonderful rest of your day.