Clean Energy Fuels Corp. (CLNE) Q2 2015 Earnings Report, Transcript and Summary

Greetings, and welcome to the Second Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only-mode. A question-and-answer session will follow the formal presentation. [Operator Instructions].As a reminder, this conference is being recorded. I’d now like to turn the conference over to your host Mr. Tony Kritzer, Director of Investor Relations. Thank you. You may begin.

Thank you, operator. Earlier this afternoon, Clean Energy released financial results for the second quarter ending June 30, 2015. If you did not receive the release, it is available on the Investor Relations section of the Company's Web site at www.cleanenergyfuels.com, where the call is also being webcast. There will be a replay available on the Web site for 30 days. Before we begin, we'd like to remind you that some of the information contained in the news release and on this conference call contains forward-looking statements that involve risks, uncertainties, and assumptions that are difficult to predict. Words of expression reflecting optimism, satisfaction with current prospects, as well as words such as believe, intend, expect, plan, should, anticipate, and similar variations, identify forward-looking statements, but their absence does not mean that the statement is not forward-looking. Such forward-looking statements are not a guarantee of performance, and the Company's actual results could differ materially from those contained in such statements. Several factors that could cause or contribute to such differences are described in detail in the Risk Factors section of Clean Energy's Form 10-Q, filed August 5, 2015. These forward-looking statements speak only as of the date of this release. The Company undertakes no obligation to publicly update any forward-looking statements or supply new information regarding the circumstances after the date of this release. The Company's non-GAAP EPS and adjusted EBITDA will be reviewed on this call, and exclude certain expenses that the Company's management does not believe are indicative of the Company's core business operating results. Non-GAAP financial measures should be considered in addition to results prepared in accordance with GAAP, and should not be considered as a substitute for, or superior to, GAAP results. The directly comparable GAAP information, reasons why management uses non-GAAP information, a definition of non-GAAP EPS and adjusted EBITDA, and a reconciliation between these non-GAAP and GAAP figures is provided in the Company's press release, which has been furnished to the SEC on Form 8-K today. Participating on today's call from the Company is President and Chief Executive Officer, Andrew Littlefair; and Chief Financial Officer, Bob Vreeland. And with that, I’ll turn the call over to Andrew.

Thank you, Tony. Good afternoon, everyone. And thank you for joining us. I’m pleased to review our second quarter 2015 operating results with you today. We delivered 74.4 million gallons this quarter, up 15% from 16.8 million gallons we delivered in the second quarter of 2014. Revenue was $86.9 million in the second quarter versus $98.1 million a year-ago. Revenue decreased primarily due to three factors. Our overall effective price, which is primarily driven by lower natural gas commodity prices drop by $0.10 per gallon compared to the second quarter of last year. A simple way to think about this is when applied a 74 million gallons, this affected our revenue by close to $7.5 million. And as I told you last quarter we had $9.1 million in construction projects that were essentially complete at the end of the first quarter, but we’re still unable to recognize about $6.4 million of the revenue. This particular construction projects is part of a larger facility. Our portion is complete and we’ve been paid, but we’re waiting for the completion of the remainder of the facility to be able to recognize the revenue which we anticipate in the third quarter. And lastly our Clean Energy Compression subsidiary was somewhat challenged due to the global decline in oil prices, the strength of the U.S dollar and a slowdown in China, all of which contributed to softened international sales. However, they improved their gross margin over last quarter by almost $1 million and continue to make progress on their product standardization. The first of their standardized units are in production now. The impact of these three factors affected our top line by roughly $19 million. Fortunately, because of our volume growth, we had incremental revenues from fuel sales of $8 million, which help offset that impact. In spite of lower oil prices, which have been challenging our recurring revenue model -- let me back up, in spite of lower oil prices which have been challenging, our recurring revenue model continue to show growth. Our margins remain relatively intact to $0.27 and fuel volumes grew 15% year-over-year. For many of our customers, volatility is much an issue as fuel price and we still offer an economic value proposition with a cleaner fuel. Along these lines with economic and clean fuel benefits, adoption continues and we see significant investments across the entire natural gas vehicle industry and in our sectors. New vehicles and platforms are coming to market and being developed including the new commenced Westport 6.7 liter engine and the CWI 9 liter near zero NOx engine. Additionally, Quantum Fuel Systems just launched a high capacity CNG fuel module last week. We’ve also seen the incremental cost of natural gas trucks continue to come down, partly due to our tank programs with agility and chart. In trucking, in the first half of the year, we’ve began fuel 700 new trucks and open 15 truck friendly stations in 11 states and we plan to open 10 more by year-end. In total, we now have 208 truck friendly stations open across 31 states in British Columbia. These include Corridors, the I-5 and Highway 99 between northern and southern California. On the I-40 from LA to Oklahoma City, the I-10 from LA to Jacksonville, the I-20 from LA Birmingham going through Dallas and on the I-95 from Jacksonville to Richmond and CNG tractors can now go from Washington DC through Philadelphia, New York, and Boston. We now fuel close to 3,000 Class-8 heavy-duty trucks nationally. We recently our demo truck programs where we lend new CNG or LNG trucks and box trucks to potential customers. Our goal is to provide as many fleets as possible with the opportunity to test drive these natural gas trucks, if they have a positive driving experience on top of enjoying the benefits of a cheaper and cleaner fuel. The demand for these trucks has been strong and there are currently 93 fleets on the waiting list to demo the trucks in both our core and trucking segments. In our refuse market, the momentum continues. We have completed 17 station projects to date and we anticipate we will complete 36 refuse station projects by the end of the year. We’ve added nine new contracted projects to our refuse pipeline in last month alone. It become almost a requirement for refuse companies to convert at least part of their fleets to natural gas in order to stay economically and environmentally competitive. We currently fuel over 9,000 refuse trucks daily. In our transit market, in the second quarter, our customers ordered or added 224 buses to their fleets. This equates to over 3 million gallons annually. We announced the Big Blue Bus of Santa Monica has become one of the country’s first municipal transit authorities to convert its entire fleet to our Redeemed branded renewable natural gas that is 90% cleaner than diesel and is the cleanest transportation fuel commercially available. In addition, to Big Blue Bus, UPS previously committed to fueling which Redeem for a portion of its heavy duty fleet as part of their plan to drive one billion miles using alternative fuel by the end of 2017. We comment Big Blue Bus and UPS for their commitment to using cleaner fuel and we look forward to working with other major companies and fleets who value that same commitment to sustainability. For the first six months of the year, we saw a 21 million gallons of Redeem and we’re on track to double what we delivered in 2014. Across all our markets, we’re working with over 950 fleet customers representing close to 42,000 vehicles that we fuel on a daily basis. On NG Advantage, we’re pleased with the volume growth, having delivered over 10 million gallons in the first two quarters. We are expanding our station in Milton, Vermont to add 30% more contracted capacity. This is the second significant upgrade of that station in the past year to meet demand of contracted volumes. On the policy front last week, the Highway Trust Fund Legislation was passed by both houses of Congress and was signed by the President. Within the bill is a provision to equalize the federal tax in LNG to an energy equivalent basis with diesel and gasoline. The result will lower the tax in LNG by $0.17 per diesel gallon equivalent effective January 1, 2016. Additionally, 26 state legislatures have already taken similar action to equalize transportation fuel taxes. Across the country we’re seeing the development of robust grant programs to support fleets to dock natural gas. Here in California, Prop 1B funding will provide $65,000 per truck for fleets to qualify. The Prop 1B funds totaled over $260 million, which will become available later this year and will be allocated throughout 2016. So far this year, we’ve received $40 million in grant funding for 17 stations and 546 natural gas vehicles in 25 states. Regarding our balance sheet, at the end of the second quarter, we had a $182 million of cash and investments and we’re on track with reduced CapEx program of $59 million. We are focused on the 2016 convertible notes which are due at the end of August of next year. We have flexibility with different options including cash, stock, or a combination of both and we’re in regular communication with the noteholders. We plan to file a universal shelf registration statement of $500 million in the coming days to replace our expired shelf. We don’t have any immediate plans to use the shelf, but we think this is good corporate practice and gives us the tools and flexibility should we needed. And with that, I’ll turn the call over to Bob.

Thank you, Andrew, and good afternoon to everyone. It’s my pleasure to go over our financial results for the second quarter ended June 30, 2015. Overall, we made progress in the second quarter, mainly our adjusted EBITDA improved by $3 million from negative $5.6 million in the first quarter of 2015 to negative $2.6 million in the second quarter of 2015, and slightly less volume in the second quarter. And we improved our adjusted EBITDA by $2 million over the second quarter of 2014, despite lower revenues in 2015 compared to 2014. Now I’ll go over some specifics for the second quarter of 2015. Starting with volume, compared to the second quarter of 2014, as we reported, volumes grew by 9.5 million gallons or 15% over the second quarter of 2014. Refused increased 27%, trucking increased 19%, together transit and fleet services increased around 5% and our industrial sector more than doubled to a little over 6 million gallons. When compared to the first quarter of 2015, I want to point out that volumes were down in the second quarter of 2015 by a net 2.7 million gallons as a result of fully finishing our involvement with our former biomethane plant in Dallas, effective mid April of 2015. On a year-to-date basis, through June 30, our volumes are up 20% or 25.4 million gallons over 2014. Our revenues of $86.9 million or $11.2 million last -- then a year-ago which is principally a function of lower fuel prices driven by lower commodity costs, the timing of station sales and our compressor business. Lower fuel prices represented about $5.6 million of the decline in revenue. Fewer stations completed and recognized represented about $5.2 million of the decline. As Andrew mentioned, we still have one large station being deferred to the third quarter from the first quarter. Lower revenue at Clean Energy Compression Corp of about $8.1 million, reflects the general softness in the international marketplace as previously mentioned. These declines in revenue were partially offset by 7.9 million in higher revenues from the 9.5 million incremental gallons in 2015 over 2014. It’s important to note that our effective price per gallon declined $0.10 per gallon from a year-ago, while our effective costs per gallon declined $0.08 for a net impact of $0.02 on margin per gallon. So this has a fairly significant impact on revenues at $0.10 a gallon and less of an impact to our margin. Now moving on to margin, our gross margin per gasoline gallon equivalent was $0.27 in the second quarter of 2015 compared to $0.29 in the second quarter of 2014, and $0.28 in the first quarter of 2015. The decline of $0.02 from 2014 was attributed to a volume mix, a higher concentration of incentive programs that are tied to fuel deals in 2015 and some pricing squeeze from today’s low price environment. Offsetting these margin pressure was another solid quarter of our RIN credits at $2.9 million associated with our sales of Redeem, our renewal natural gas. All in all, we’re holding steady on our gross margin per gallon and are rather fluid pricing environment. As Andrew mentioned, we saw gross margin improvement of around $1 million from our Compression Corp in the second quarter when compared to the first quarter of 2015. This was mainly from cost controls and a focus on selling core products versus larger custom build projects. However, the challenge remains due to a soft demand internationally as we’ve mentioned. Our SG&A spending remain under control at approximately $29 million for the quarter, a decline of 16% from a year-ago and a 4% decline from our most recent quarter. Our cash investments totaled $182 million at June 30, 2015. We continue to control capital expenditures as planned. We spent $26 million on CapEx in the first six months of 2015 compared to $62 million spent on CapEx for the first six months in 2014. NG Advantage is about $10 million of the $26 million spent in 2015. So on a comparative basis; you’re really comparing $16 million to $62 million or a $46 million reduction while volumes are growing. As I mentioned, our adjusted EBITDA for the second quarter of 2015 was negative $2.6 million. The improvement of $3 million over our first quarter of 2015 was primarily from improved margins at the Compression Corp, station sales and lower SG&A spending. We improved by $2.1 million compared to 2014, despite a $11.2 million less in revenue in the second quarter of 2015 versus 2014. In comparing to the second quarter of 2014, our adjusted EBITDA was negatively impacted by lower station sales and Compression Corp revenue in 2015 that positively impacted by our increased volumes between the periods as well as our reduced spending on SG&A. Now we’ve seen improvement in our quarterly adjusted EBITDA and we expect to continue to leverage our station and cost infrastructure and grow volume such that we expect these improvements to adjusted EBITDA to continue. It is unlikely we will get a positive adjusted EBITDA for the full-year, but it is still possible. However, we anticipate getting to positive quarterly adjusted EBITDA by the end of this year as we make steady progress, growing volumes, and leverage the infrastructure of our business. And with that, operator, we will open the call to questions.

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Rob Brown from Lake Street Capital Markets. Please go ahead with your question.

Good afternoon.

Hi, Rob.

Hi, Rob.

Could you just give us little more color on the pipeline of sort of new fleets or just in fleets expanding to natural gas? I know a number have been testing it, but where is that at with oil, it’s obviously slowed down but has -- are people still moving forward, are they evaluating it? Where are things at with the lower oil price in the pipeline?

Yes, Rob I’m glad you asked that question, because we haven’t had any current customers leave the program or turn back the keys with their natural gas truck. Let’s face it, lower, lower diesel price and oil prices, those customers that are on the fence has given them even more to think about. However there is still lots of new fleets coming to the program. We just this last week, we -- and I can't go through all their names with you right now, but we’ve had about eight or nine new fleets, field more trucks. I think our demo truck program where we got really 90 some odd fleets in the queue to test those vehicles. I think it’s very encouraging. So we have seen good examples of our current customers UPS and Waste Managements and others continue to order vehicles and that really hasn’t slowed. We just have to put more in the pipeline and get more people exposed. We still have, I think it’s important to remember, we still have an economic offering. And in this last nine months or so since the oil has done what's its done, the incremental cost has come down significantly on these trucks, as I mentioned in my remarks. But we’ve seen concrete examples of the incremental cost on the 12 liter truck going from somewhere around $40,000 somewhat to $22,000 to $25,000 and so that’s been very helpful. So we’re still able to save customers and we’re between $0.75 to over $1 a gallon. So the economic proposition is still there. We’re still getting new people to sign up.

Okay, good. And then it sounds like refuse has become sort of the standard to having natural gas. What's sort of the thinking on when that can happen in trucking, is that -- I know its hard to predict, but are you still in a path to having that ultimately be the case in trucking where everybody [multiple speakers]?

Yes, I haven’t lost any optimism for what I think is going to happen. To me it’s impressive that UPS hasn’t bought a diesel truck in two years. I mean look, this is the one world leader in terms of logistics and has one of the largest fleets, and haven’t bought a diesel truck in two years. So to me that’s very telling. We’re still having some of our big shipper friends, Unilever, MillerCoors, Procter & Gamble and others requiring their contracted carriers to move to natural gas. This year you’ll probably feel about as many new heavy duty Class A trucks on natural gas as you will refuse trucks, and so -- but it’s a much larger market. And so I still remain very optimistic that we’ll get on a much higher penetration rate, of course having fuel at higher price is the delta one, the delta increases, it will make it that much more compelling for fleets. But I don’t know, I can't give you a time Rob, but we’re still saving these guys money and its still pretty impressive. As I mentioned in my remarks there’s still a lot happening in the business, there’s new models coming to market, there’s new engines coming to market. I quickly went over it, but the Cummins 9 liter and next year sometime the 12 liter of low NOx engine, I think that’s a game changer. Now you’re talking about an engine that’s almost 10 times cleaner now and the future of the low NOx has occurred. And so that really makes us competitive when we put it that with the renewable fuel. Its one of the cleanest vehicles on the road in the world. And so investments continue to be made, our customers are building stations and ordering vehicles.

Excellent. That was a great review. Thank you.

Thank you.

Our next question comes from the line of Laurence Alexander from Jefferies. Please proceed with your question.

Good afternoon. Could you help with a couple of things. First, I think was a quarter or two ago you mentioned that seeing some competitors likely being forced to shut capacity or slowdown their project build out. Have you actually seen that play out, and how are you seeing the competitor dynamics right now?

Well, as we talked I think before Laurence, well there is a lot of people that are in “fueling business” as we’ve reviewed before some of them are regional, some of them are partnerships with utilities, some of them are relatively small compared to us. Yes, I mean we’ve seen just recently in the last couple of weeks, we’ve seen few different smaller competitors either out searching funds or being put up for sale. Look, this is a difficult business and if you only have four fueling stations at light duty convenient stores, this is tough. Because now you’re going up against really small fleets and light duty gasoline vehicles, so it’s difficult. So I would say yes, we’re seeing a consolidation. You go back with me Laurence and think, I don’t know six months ago, boy there was a lot of companies talking about building -- getting ready to launch 100 stations and those kind of thing, but you don’t hear anything about that anymore. So there are some larger competitors that are still proceeding that we will. We’ll build more station projects this year than we did last year close to 70 and some of our other larger competitors [indiscernible] gain and a few of these others, they’re continuing. But I think for some of the smaller companies this is a difficult environment.

And then with the tax changes that have been passed and also the draw up in the truck premium back with the envelop it looks as if the truckers are getting about one and half year payback.

I think that’s fair.

Are you hearing that from your customers as well?

Yes, I think that’s fair. I mean it depends on exactly the price that they’re paying. But there was a time we’re even a little bit better than that. Of course it all depends on how much fuel. I was kind of figured you’re using a 20,000 gallon annual truck. We have some customers right now, one that’s taking delivery of 12 trucks as we speak; they use 37,000 gallons annually -- a year per truck. But if you use that 20,000 one, we’re still able to save these guys close to $1 a gallon, and so you’re somewhere around a year and a half. That depends on the tank pack as you’re putting in place, but we’ve seen significant reductions in the price of these trucks. So anywhere in the less than two years, year and a half area, I think this still makes a lot of economic sense.

And then just one last one if I may, if you had 100% conversion of your pipeline, do you have any sense for what the gallon opportunity is that’s embedded in your existing target?

Wow, it would be a big number, right? So I don’t know that you want me to quote that. But I mean its -- well…

Yes, actually I just got a sense for, without changing anymore minds if you just change the …

Yes, well if we just got the 200 or so fleets that we’re working with and that began to really kind of do what the refuse guys have done over time and go from 10 to 100. I mean you’re talking about 10s of 1000s of trucks. So we’re working with very large customers and they have the ability to take big numbers of vehicles. That’s why I like, when I mentioned these 950 fleets and that business sound like a very big number, but that 950 fleets, I’m just kind of guessing on top of my head, that probably deals with -- that probably would get you into a million or couple of million vehicles at that 950 fleets. So we’re dealing with the right people and it’s just the matter of getting them comfortable with the experience, matching that up with the infrastructure and that’s happening. I went through that in my remarks, when you begin to look and we have these maps and if you ever want to have those, you can let us know. But we have these maps that show coverage across the country and its pretty impressive now that the coverage you get 300 miles away from our stations these are overlapping umbrellas if you will and you’ve covered most of the country. So you’re able now to deal with lots of corridors, lots of trucking where there’s an off a lot of regional trucking that happens in the country that go from Houston to Dallas and places like that, and so we’ve got that infrastructure in place today.

Okay. Thank you.

Yes, you bet.

Our next question comes from the line of Eric Stine from Craig Hallum. Please proceed with your question.

Hi. Good afternoon, it’s Aaron Spychalla. Thanks for taking the questions.

Sure.

Maybe first on Mansfield, can you give us an update there and the JV for bulk fuel hauling. How many stations do you guys have inside the fence now and what does the pipeline look like there?

Okay, well now you know that our Mansfield joint venture ride is the bulk fuel hauling joint venture. So that’s really targeted at people that are -- the trucks that are going in and out of terminals. So we just got started with that. Our first station opened in Doraville, Georgia in November and I’m pleased to report its now doing 40,000 gallons a month which is a nice start. We’ve got two other locations that we can't -- I can't mention the names right now but two other locations where we’re just finishing up the contracts with other fleets where they’ve committed to go. Now I will say this, that particular segment bulk fuel hauling. Now as you’re dealing with people that are hauling gasoline and diesel and in some places in the country, diesel has dropped significantly. So we’re having to work very hard and being very aggressive on pricing to make sure that those still will happen. But I think what we’ve seen is we proved out the model, it’s a good segment for us, we’re with the best in the business which is Mansfield and those -- we’ve always figured that we would build a few more this year and I hope that we get those things launched too shortly -- those new stations.

Right. Thanks. And then, could you maybe provide some color on the AB 857 legislation and what that might mean for your business if we continue to see that move forward?

Right. Well for those on the phone, it’s the piece of California legislation. So when it gets tied into the cap and trade funds, there’s a big part of money now in California and its getting to be I mean large, I mean we’re now talking as much as a couple of billion dollars, AB 857 would, starting in 2018 to 2023 would make available $100 million a year for natural gas heavy duty trucks. So it’s significant for us. We like -- we’re working hard on that now. We’ve got very good support in legislature. We get up to $100,000 of grant money per truck when we have that low NOx truck, that’s why I’m so excited about the potential of what Cummins Westport is doing on that low NOx truck that really puts us way ahead of what diesel can do and other fuels can do. So we’re excited about it. It’s not done yet, but it’s significant. That does bring me to just highlight that Prop 1B, I mean the Prop 1B money is slopping around right now. Its $260 million, it gets [indiscernible] out to the air districts in California, San Joaquin, the Bay Area, the South Coast. We have our sales people working with fleets right now. That money was being coordinated by their resources board and I think maybe the California Energy Commission, that money will get distributed out to the air districts and then the fleets submit for it, and that is underway and it’s significant for us.

Good. Thanks for taking the questions.

Okay. Thank you

Mr. Littlefair, there are no further questions at this time. Would you like to have any closing remarks?

Sure, operator and everybody on the call, thank you for dialing in this afternoon. We look forward to updating you on our progress in the next quarter. Thank you.