Clean Energy Fuels Corp. (CLNE) Q3 2015 Earnings Report, Transcript and Summary

Greetings, and welcome to the Clean Energy Fuels Third 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 third quarter ending September 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 website 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 November 05, 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 excludes 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 will turn the call over to Andrew.

Thank you, Tony. Good afternoon everyone and thank you for joining us. I’m pleased to review our third quarter 2015 operating results with you today and I'm particularly pleased to announce that the Company's adjusted EBITDA turned positive this quarter which is a significant milestone. This is due in large part to both the continued growth in our volumes and by leveraging our station infrastructure which we've invested in over the last several years. In Q3 our volumes were 80.6 million gallons, a 17% increase over Q3 2014 and our revenues were $92 million. Importantly our margin per gallon has held up in the face of oil prices that are half of what they were last year. A perfect example of leveraging our infrastructure is our growing relationship with Raven Transport. It has deployed an additional 40 LNG trucks since we last reported. These trucks fuel at 21 of our stations on interstate corridors throughout the Southeast. Raven now operates 223 LNG trucks in their fleet. Another example is our customer Saddle Creek Logistics who just celebrated reaching the 50 million mile mark with their CNG fleet by announcing they are adding 50 CNG trucks to their existing fleet of 200 CNG tractors. During the quarter we have contracted over 300 new heavy-duty trucks which represent close to 4.5 million gallons annually. I think it is important to understand that despite lower diesel prices, fleets like Raven, Ryder, Waste Management and UPS are still making the transition to natural gas because of the economics remain compelling, but also because the price of natural gas continues to remain low and stable which is extremely important to fleet operators. And while load stable pricing continues to be a reason for fleet operators to switch we have seen a renewed focus on the environmental and sustainability benefits of natural gas is a major catalyst in the decision process. The shippers, big brand names like Procter & Gamble, Unilever, Anheuser-Busch and many others increasingly want their contracted trucking companies to haul their products throughout the country on cleaner natural gas. These consumer-oriented companies have self-imposed sustainability goals and there's nothing in their operation that is more immediately impactful towards achieving these goals than having their contractors run natural gas trucks. And because these companies are ultimately responsible for covering the fuel cost of their contracted fleets they have significant influence in the purchasing decisions of their haulers especially because the companies directly benefit from the fuel savings. We have seen some of our customers like Raven Transport pick up business because of their conversion to natural gas. The growing commitment towards sustainability extends to refuse companies, municipal transit agencies and universities across the country as well. We are seeing this first hand and the growing success of our Redeem, renewable natural gas fuel offering which is the first commercially available renewable natural gas made from organic waste and is up to 90% cleaner on carbon emissions. Major companies like UPS as well as municipalities like Santa Monica's transit bus fleet and universities like UC San Diego have made the commitment to Redeem. Year-over-year our Redeem volume has almost tripled from 13 million gallons to $36 million gallons. The other significant environmental game changer I'd like to highlight is the certification of Cummins Westport Low NOx 9 litre engine. As a reminder nitrous oxide or NOx is emitted from vehicle tailpipes creating smog. This new engine will reduce NOx emissions by 90% from current EPA standards as well as meet the 2017 EPA Greenhouse Gas Emissions Standards and the proposed 2023 California Air Resources Board to low NOx engine standard. It was certified at 0.02 versus the 0.2 gm standard which is the lowest engine standard for NOx in the world for heavy-duty trucks. What is important here is that given the profile of electricity generation in the United States, this natural gas engine is cleaner running than electric vehicle that is plugged into the grid. California is establishing even more aggressive carbon and petroleum reduction goals and like many car environmental regulations, often these regulations are eventually adopted in other states and at the national level. When you combine our Redeem vehicle fuel with the low NOx engine, it is hands down the cleanest heavy-duty vehicle available anywhere in the world. It will be 90% less NOx and up to 90% less carbon. And this story is just becoming understood. Here in California the South Coast Air Quality Management District has made tremendous progress in improving regional air quality. However they still need to reduce NOx emissions by an additional 70% and 80% to meet their 2023 and 2031 federal ozone attainment deadlines. Not only do diesel trucks make up roughly 70% of the South Coast air toxins, these trucks are the largest source of NOx emissions in the region. Therefore this low NOx engine is crucial to South Coast's achievement of those air quality goals and why multiple California agencies including the California Air Resources Board are strongly supporting Cummins Westport with this effort. To help accelerate the adoption of natural gas trucks in California, the voters passed Proposition 1B which among other things will provide up to $65,000 per natural gas truck and up to $100,000 for a low NOx natural gas truck for fleets who take advantage of this program making those trucks much more competitive than diesel. The PROP 1B funds available total over $165 million. And these funds are available now and will be allocated throughout 2016. Turning to our refuse market, we now work with more than 130 different refuse companies. Our long-time refuge customers, waste management and republic services continue to increase the percentage of natural gas trucks in their fleets and learned early on how economically and environmentally beneficial adopting natural gas trucks is to their operation. In total, our refuse customers added 240 new trucks to their fleets in the third quarter. We completed 12 refuse station construction projects and have completed 27 projects to date and we anticipate we will complete a total of 33 refuge projects by year end. Since our last call, we have signed 17 new contracts to add to our station project pipeline. In our transit market, we signed contracts with Akron [ph] Transit in Ohio, Arlington Transit in Virginia and the City of Olathe in Kansas. We are expanding stations in Long Island for Nice Transit and Jacksonville Transportation Authority too delivery of their first CNG busses this quarter and plans to convert their entire fleet to natural gas over the next few years. We saw increased volume from our transit customers in Las Vegas, Dallas and Tampa, because they continue to add more natural gas transit busses. On NG Advantage, our subsidiary which provided a virtual CNG pipeline to large energy consumers we announced that they were awarded a contract extension with International Paper for their Ticonderoga, New York paper mill. This is now the largest mobile pipeline project in the country. In our compression division we have begun to ship our new standardized compressing units. As I mentioned on previous calls, we initiated significant operational improvements and those changes are beginning to take effect. Regarding our balance sheet and financials we continue to make sure that we are operating the business efficiently as we continue to grow our volumes and getting operating leverage out of the business. As an example, over the last five quarters we reduced our SG&A by 20% while we grew our volumes by 24%. All this is in the face of a challenged oil environment. Through the end of September we spent $40 million in CapEx compared to roughly $75 million through Q3 of last year. We remain focused on the 2016 convertible notes which are due at the end of August of next year. We are in regular communication with note holders and we expect to repay these notes with a combination of cash and stock ahead of the maturity date. Deleveraging the balance sheet is a priority. I'd like to end my prepared comments by commending the Clean Energy team for reaching our goal of turning EBITDA positive this quarter. We did this despite the low price oil environment by staying focused and having a superior national service offering for customers along with price stability, fuel diversity for fleets, lower incremental vehicle cost and the unmatched sustainability benefits of natural gas. As we have recently seen in the headlines, the true impacts of these emissions are seriously in question and a heavy-duty electric truck is at least a decade away. There is no other alternative vehicle fuel solution that is more cost-effective and immediately environmentally beneficial as natural gas and fleet operators are beginning to clearly understand that. And with that, I'll turn the call over to Bob.

Thank you, Andrew and good afternoon to everyone. It is my pleasure to go over our financial results for the third quarter ended September 30, 2015. We continue to make steady progress with our volume growth and improvement in our adjusted EBITDA. Our volume of 80.6 million gasoline gallon equivalents for the third quarter of 2015 represented a 17% increase on a year-over-year basis and our adjusted EBITDA of $3.1 million was an improvement of $5.7 million over the second quarter of 2015 and an improvement of $8.7 million over the first quarter of 2015. A year ago for the third quarter of 2014 our adjusted EBITDA was negative $2 million on higher revenues. Now I'll go over some specifics for the third quarter of 2015. Starting with volume compared to the third quarter 2014. Our volume growth of 17% came from refuse which increased to 29%. Transit and Fleet services combined increased 3%, trucking increased 13% , our industrial sector including our majority-owned subsidiary NG Advantage increased by 6.5 million gallons totaling 10 million gallons for the third quarter of 2015 And our biomethane plant volumes were down on a year-over-year basis by 1.7 million gallons principally from having to plants in operation in 2015 versus three plants in operation in 2014. As you may recall we sold our Dallas biomethane plant at the end of 2014. On a year-to-date basis through September 30 or volumes were up 19% or 37.5 million gallons over 2014. Our revenues of $92.3 million or $11.1 million less than a year ago which was principally from lower effective pricing on our volume related revenue, fewer fueling stations sold and a global softness in our compressor business. The lower effective pricing represented $5.7 million of the decline in revenue. Station construction revenues were down $10.3 million. Clean Energy Compression Corp revenues were down $6.4 million. These declines in revenue were partially offset by $9.8 million in higher revenues from incremental gallons and $1.5 million in incremental low carbon fuel standard credits. The lower effective pricing is being driven by lower commodity costs and product mix changes which were partially offset by higher renewable fuel or RIN credits. The decline in station construction revenues is mainly attributed to us selling more station upgrades in 2015 versus full stations sold last year, as well as the normal timing aspect of the construction process. This still represents an expanding investment in natural gas by our customers. The lower revenue at Clean Energy Compression Corp reflects the same general softness in the international marketplace caused by the low oil price environment. Our gross margin per gasoline gallon equivalent was $0.26 in the third quarter of 2015 compared to $0.28 in the third quarter of 2014 and $0.27 in the second quarter of 2015. The decline of $0.02 from 2014 was attributed to differences in fuel mix helped by incremental RIN credits in 2015 from greater Redeem volumes. All in all we are holding steady on our gross margin per gallon in this low oil price environment as we are somewhat insulated from the retail price environment due to the diverse nature and national footprint of our recurring volumes. We saw additional gross margin improvement from Clean Energy Compression Corp in the third quarter when compared to the second quarter of 2015, although their gross margins are still depressed as a result of the lower sales volumes. We also picked up $1.5 million in incremental LCFS margin when comparing 2015 to 2014 in the third quarter. Our SG&A spending was approximately $28 million for the quarter representing 2% decrease from a year ago and a 4% decline from our most recent second quarter. We had a couple gain items in the quarter totaling $2.4 million related to our former Dallas biomethane plant. These items related to additional sales proceeds received after passing some post sale performance tests at the plant and we received money from the settlement of a construction vendor claim. The $2.4 million was reported in other income in our statement of operations. Our cash in investments totaled $166 million at September 30, 2015. We continue to control capital expenditures as planned. As Andrew mentioned, we’ve spent $40 million on CapEx in the first in the first nine months of 2015 compared to $75 million spent in the first nine months of 2014. A $35 million reduction while volumes are growing. All in all a good quarter with volume growth and improved adjusted EBITDA. We expect to stay the course of leveraging our infrastructure and growing volumes as we look forward recognizing the challenges from the low oil price environment remain in the near term. And with that operator, we’ll 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 proceed with your question.

Good afternoon and congratulations on a good quarter.

Thanks Rob.

On the EBITDA, the positive EBITDA run rate how do you see that’s sort of trending? Is this sort of a level you can build from or is it sort of bounce at this level and then depends on volume or how do you sort of see that EBITDA trending going forward?

Well, the plan is for it to trend up. Now I will say that as I mentioned just a minute ago, we did have a couple gain items in there about $2.4 million, so I don’t expect that that will occur again, but other than that, then the idea is to continue to grow volumes and increase the EBITDA.

Okay, okay great. And then Andrew could you update us on the cost of the vehicles kind of coming in what the sort of economics and payback picture looks like in the current commodity environment?

Sure, as I mentioned Rob a quarter ago, maybe it was as even a little longer ago, that we have, thank goodness for the industry the cost of the vehicles has come down some. We’ve seen the incremental cost over the last three, four years come down. Right now, some of the latest deals that we have seen and I’m not going to name the people that have taken the vehicles, but we’ve see LNG truck incremental pricing all end at $35,000 and we've seen CNG pricing it closure to $45,000. That’s down from where we had been half a year ago by $10,000 or more dollars per truck. So that’s good and then as you know that the prior where our margins or are at least our price per gallon and the differential between diesel has been compressed. So we’re seen paybacks on those kinds of trucks that are using 20 plus thousands gallons a year. The paybacks increased some. It is not too long ago where we were just outside of the year and I’d say now the payback is it depends. We have a real good customer, Matheson who is a bulk U.S. mail carrier, they do 40,000 gallons a year per truck. Obviously their payback is different, but payback has gone from over a year to closer to two years. We’re still able to save our customers anywhere between $0.50 to $0.75 and in some cases, $0.80, $0.85 a gallon.

Okay, great. Thank you very much.

Thank you.

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

Hi everyone. Nice quarter.

Thank you.

Thanks Eric.

So, obviously nice volume growth and you are leveraging the stations, may be can you just talk about kind of the trends you see, I don’t know if its buy doing kind of the same-store sales into a sales number for a station that's been open for a year? [Audio Gap]

Raven units were at a handful stations, I'm kind of guessing here, but I want to say it was between five and six stations. Because we have, we've spent the capital because we have the corridors and stations that we could open now we’re feeling those actually were actually have last month fuel Raven’s trucks at actually 25 of our network stations, though I would say consistently they used 21. It is what we’ve seen as we’re able to because we have the network, we’ve seen station volume grow at not just the four, or five original stations but at many others. So the stations that we’ve opened that are truck friendly, the volumes have gone up now. Now look we all know we’re in a tough environment and we know that what we’ve been seeing is we haven’t had any of our customers that have been with the program turn back. Really to the contrary, we continue to see those have made significant investments continue to add tracks, which we’re pleased with that. They still see an economic reason and they still and they are getting the sustainability of benefit. We a year ago, we didn’t speak as much about this sustainability piece, but it is an important piece certainly for these consumer facing companies and it’s kind of real and not a day goes by that we are reading about global warming and new ethane emission standards and EPA standards, now this isn’t going unnoticed with our customers. But we haven’t seen any customers come back. Now I would say, let’s face at those customers that were on the fence this low diesel price is challenging and we are still in open dialogue with a lot of them. We are still doing work with some, we’re actually right now working with several new fleets to participate in this California program here that would be new to the program. So those are customers that believe we’re in a long downturn of diesel and oil prices. They’re taking a real hard look at it, others though, that we’ve worked with over time are continuing to add vehicles.

Okay. I mean just sticking with the environmental theme, I know that California recently, I guess it’s been there, but putting back in place the Low Carbon Fuel Standard, is that I mean the number one I would think that gives Redeem a pretty nice advantage in the market, but then also just curious, they put in the targets to reduce carbon intensity through 2020. Is that something that can have a meaningful impact on your margins as well, on your bottom line as well?

Yes absolutely, we’re one of the biggest players in the Low Carbon Fuel Standard period. We, I don’t want to say we serve move and produce more low carbon fuel than anybody else. But we’re certainly near at the top if not at the top and so yes it’s important for us, just as our Redeem offering having UPS and some of these large fleets begin to, it is now mistake that they are availing themselves to Redeem. I mean that fuel is 90% less carbon and we’re seeing other large fleets going out to be bid on that. You know that we, the way because we have a big infrastructure in California and in other places with certainly California with Low Carbon Fuel Standard, all of the fuel that we put into our stations in California is able to get the low carbon fuel credit. But what is kind of interesting Eric is the down we’re having fleets go above and beyond that right and ask for Redeem in other states that gets the other federal credits and this is because they consider it very valuable for their customers and for what they are doing. So yes, it gives us a leg up and it gives us a way to work with customers that may be perhaps [indiscernible] appealing before and of course we make money on it.

Okay. Thanks for that color. Maybe last one from me just turn to NG Advantage, just curious thoughts there very successful what you’re doing thoughts about expanding that to other parts of the country or also is there an ability to expand to other locations with the International Paper? A - Andrew Littlefair International Paper I believe has two other pulp plants right now on it, down one in the Southeast and I cannot remember where the other one is. On natural gas, there are other paper mills, so we’re, I think you should right now think of NG Advantage is really in the region, it’s not just in Vermont and in Upstate, New York but that Northeast is a place where natural gas where it competes with fuel and so we are out bidding on new projects. You know the price of fuel is coming as well and now the good news I guess on that piece is there are stationary users of energy they have been using fuel and other fuels that really are under environmental pressures as well. So, the same sort of thing, kind of the two-pronged approach, not just price, but also environmental concerns is helping NG Advantage. We've looked at other deals with NG Advantage in other parts of the country. We have been on a few or we are betting on couple of others. I want to keep it. I think there is a plenty of business for them for the time being and for the size of that company to really focus in the Northeast and that’s what we will continue to really, you will see more deals add at there.

Okay, thanks a lot.

Yes.

Our next question comes from the line of Jeffrey Schnell from Jefferies. Please proceed with your question.

Hi, good afternoon back to question earlier on incremental cost on the payback. Due to have optimal range that truck fleets or willing to switch that based on the conversation you are having with them.

Sure, we – Jeffrey thanks. We have known for years and this is something that we saw in the refuse than others. We know that when you get down to a one-year payback it’s kind of a no brainer for these guys. Obviously, in the heavy-duty truck market they keep, – this is now I am talking about sort of the big boys, they've used a lot of miles and turning those vehicles over what in four years, they would like to see the payback inside two years, closer you can get to one year the better. So, we are little on the outer edge today of where they would like to see it. You know our refuse guys and I think it’s important for those on the phone to understand, our refuse customers, I mean this is from the very large like we are working today with the four largest companies in America and waste hasn't backed up at all, in fact they are at 95% of the new purchase of the natural gas and the republic is good as around 60%. Those in that incremental cost is around it kind of depends that vehicle cost is around 20 some odd thousand, 23, $25,000 for those that are buying a lot of trucks. So they are getting somewhere around a year and a half payback right now in the refuse. They are not getting any other credits or anything else and so that’s enough the environmental attributes and that kind of payback makes it work for them and it does really for many, many countries – companies in the refuse business.

Great, and then lastly you spoke about adding, can you talk about how that project becomes – comes to revenue and then are those volumes already guaranteed or how are those projects structured?

Yes, so those Jeffrey and I may have slipped over that, but that was in the context to refuse use contracts so those are new refuse deals. Remember many of those will be where we are building the station and providing operation and maintenance services for them and yes we are under contract. Most of those and I don’t know exactly on those particular 17, but as you know or you may know and most of the rough use guys here are pointing their own capital. Now there are those where we spend the capital and of course when we do, we have take their pays and other kinds of contracts, but, yeah those are all under contract for us to either build them station and in the cases where we don’t go in the station and that would minority, we have anywhere from a three-year, five-year to even ten-year operating contracts with them.

Great.

And then I would say that…

Yes, go ahead Bob.

Well now I was going to say on this, so the 17, you know pretty much is looking into our 2016 just relative to the timing and that sort of thing. And so we do get a nice low kind of advanced notice on our backlog relative to our station activity so…

Great, thank you.

Our next question comes from line of Pavel Molchanov from Raymond James. Please proceed with your questions.

Hey guys thanks for taking the question. There was a news article I think earlier this week referencing a new study from Power Systems' research saying that domestic NGV [ph] engine sales are flat this year versus up 27% last year. Is that consistent to what you are seeing in the market place?

I think that this year's Pavel I think that this year's heavy-duty truck sales are going to be about flat on what they were last year, that’s I've probably heard the same things you have. I wasn’t familiar with the 27% last year, but I’ll take that, but I’m kind of thinking that the class 8 numbers were about the same as what they were last year and I guess given the current fuel environment that we're in I consider that probably pretty good. I have heard on the refuse and you’d to going to taking this from just the industry information that comes into us from time to time as that, it appears that the refuse numbers and I don’t know if this is right now Pavel going today, going forward or in this quarter, I’m not exactly sure if They will kind of up on those going into the refuse use markets. So I like that news and consider that good.

Okay and then just a kind of a small housekeeping item, I know you will file the Q later on, but what was cash flow from operations in the quarter?

Yes, that was about $1.8 million for the quarter. So, on a year-to-date basis I think we’re at like minus 1 versus last year we were at minus $56 million. So we have about a $55 million improvement there in the operating cash.

Including the [indiscernible] right?

Including the [indiscernible] yes.

That got it, all right, thank you guys.

Thank you.

There are no further questions at this time. Mr. Littlefair would you like to make any closing remarks?

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