Clean Energy Fuels Corp. (CLNE) Q3 2017 Earnings Report, Transcript and Summary

Greetings, and welcome to Clean Energy Fuels' Third Quarter 2017 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Tony Kritzer, Director of Investor Relations. Mr. Kritzer, you may begin.

Thank you, Operator. Earlier this afternoon, Clean Energy released financial results for the third quarter ending September 30, 2017. If you did not receive the release, it is available on the Investor Relations section of the company's website 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 2, 2017. 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 assumption -- excuse me, 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. I'd like to begin our call today by reviewing several important and strategic actions we took in the third quarter. We believe these actions will enhance our competitive position and result in continued improved financial performance in 2018. The first action we took in the third quarter was to rationalize some of our unprofitable legacy stations. We have procedures and systems in place, which continually assess the profitability of our stations. And there's variability in each station, but we identified those stations, which either have volume that has been cannibalized or are too costly to operate and have been unprofitable. As we expanded our station networks, some stations find themselves surplus. Most of these are legacy stations that were acquired from utilities years ago and do not have the required volume associated for them. As you know, we have 575 stations and we will be stuttering 42 stations. Given the profile of these stations, most of the volume will shift to our other stations and should remove $3 million to $4 million in annual drag. Closing these stations will result in a charge of $33 million. The second action we took was to cut our SG&A by approximately $15 million or 16%. We expect that these cuts will begin to benefit our bottom line in the fourth quarter and more substantially in early 2018, but will result in a $3 million charge in Q3. We remain very optimistic with the continued growth in the refuse, transit and trucking markets, but we are mindful of our resources as we target those markets. We are confident that with the smaller yet motivated sales team strategically located around the country, our focus construction unit and efficient support services will continue to capture a large share of the growing alternative fields market. I will point out that since oil prices started to drop 3 years ago and taking into account the latest reduction, we have reduced our annual SG&A by over $45 million, from $126 million to $80 million, still growing our volume 32%. Finally, we are preparing our Clean Energy compression subsidiary to participate in the consolidation, which is going on within the industry. We have done a good job of refining and standardizing the product mix, and continue to have a healthy market share in North America. We also have some good wins in Europe where there is a lot of movement from diesel to natural gas, demonstrated by significant recent order of our compressors by a large transit agency in Spain. But, as we all know, the overall compressor industry continues to be challenged due to the competition of relatively cheap oil. So we believe, we have taken the necessary steps to position our compression subsidiary as a potential strategic partner with another company. This effort resulted in a noncash charge of $38 million, but we are confident that these efforts will put the company in a much improved competitive position. These efforts result in $74 million of incremental charges for the quarter. But it is the right business decision to make. However, when you back out all of the one-time charges, our operating results show continued growth in the business, including $1.2 million of adjusted EBITDA. The result is, we have a streamlined business with improved growth and adjusted EBITDA margins. We are shuttering stations that have been a drag on our results, made tough choices on cutting overhead and are putting our compressor business in a significantly improved position. We have demonstrated our ability to deliver positive adjusted EBITDA for straight 8 quarters and with these changes, we believe we have -- we'll have improved operating results, including positive cash flow from operations in 2018. This is an important milestone for us. The actions that we've taken in the third quarter will continue into the fourth quarter, but all of the one-time charges are limited to the third quarter. So now onto the results of the third quarter. We are, once again, reporting sequential growth in revenue and gallons. We delivered 91.5 million gallons to our customers, an 8% increase over 84.5 million gallons we delivered in the third quarter of 2016. Revenue in the third quarter was $81.8 million. Moving on to some of our other highlights, we remain very positive about Redeem, our renewable natural gas business. As we predicted, when we made the announcement of the sale of our RNG production assets to BP earlier this year, bringing a major player like BP into the RNG production business, has allowed us to more aggressively market our Redeem fuel and with great results. Since the BP deal was completed, we've inked our largest Redeem deals today with L.A. Metro and Republic Services, representing approximately 70 million gallons a year once fully implemented. Also since then, there has been a regular stream of announcements of the green lighting of additional RNG production plants around the country as well as other companies marketing RNG fuel. We see this as a positive confirmation that the demand for RNG is growing rapidly. We're confident that we're well-positioned as the only company with a nationwide fueling infrastructure that is capable of delivering the additional RNG gallons that will be available. Remember, that in order to monetize the RNG fuel gallons, the fuel must be delivered through a downstream station network and ours is unmatched. We also remain bullish about the potential of the heavy duty trucking market continuing its transition to natural gas Clean Engines. While it has been slower than when we had hoped -- slower than what we had hoped, there continues to be positive momentum. For instance, the U.S. Postal Service is implementing aggressive mandatory programs with dozens of companies that contract with them. And as we speak, the governing boards of the ports of Los Angeles and Long Beach are meeting to consider the latest update of their Clean Air Action Plan, which adopts far reaching strategies to further reduce air emissions and support California's vision for more sustainable freight movement. As a reminder, part of the plan could dramatically change the makeup of the 16,000 heavy duty trucks that move in and out of the ports every day. The plan calls for 0 emission trucks by 2035. It places a fee on diesel by 2020. Only 0 emission natural gas trucks are commercially available today to satisfy that requirement. In fact, there's upwards of $550 million of incentive money available beginning in December to get near 0 trucks on the road next year. The new Cummins Westport ISX12M will roll out in March and April. So we have a great opportunity to begin getting the cleanest natural gas trucks in the world on the road. The significance of this decision will reverberate throughout the entire trucking industry. Cities around the world have woken up to the ill effects of diesel and are setting timelines to completely phase out the dirty fuel. Just yesterday, California raised the tax on diesel by $0.20 per gallon. And we believe this plan will put pressure on other ports, entire cities and the country to seriously look at tackling the harmful impact that diesel has been causing for generations. With Cummins Westport's advancement in their natural gas technology and the growth of RNG, there is no better solution. We continue to be disciplined with our capital spending. We've dramatically reduced the levels since building out our national fueling network several years ago and we are on track to reduce it again in 2017. We anticipate spending this year to be approximately $17 million on new station construction and upgrades. At the end of the third quarter, we had $197 million of cash and investments on the balance sheet. I'd like to close by recapping the importance of the actions that we have taken over the last quarter to position Clean Energy for the long term. We have a growing business and a very bright future as more and more policymakers and companies realize the urgent need to continue to clean up our air and address long-term climate issues. There's no other alternative to transportation solution that can achieve these environmental benefits that is available today for all sectors and that is affordable, like natural gas. The streamlining we have done recently won't impact our ability to grow one bit and what it will do is allow us to better focus on the right growth opportunities within our business and deliver enhanced results to our shareholders. And with that, I'll turn the call over to Bob.

Thank you, Andrew, and good afternoon to everyone. The third quarter was a unique quarter for the company. As Andrew pointed out, the positive actions we've taken to better leverage our ongoing fueling business and improve operating results and cash flows looking forward. These actions taken in the third quarter resulted in incremental charges of $74 million related to asset impairments, valuation adjustments and additional operating expenses. Without these incremental charges, our net operating results were in line with expectations. It's also important to point out that only $4 million of the $74 million is expected to result in cash outlays in the future. We've taken these actions to strengthen our financial results and cash flows given the environment we're in today in the alternative fuel space. Fortunately, we have the critical mass and strong recurring volume to allow us to streamline operations and eliminate stations without disrupting our fueling network footprint. These actions will change our financial model going forward, but primarily beginning in 2018. For our Clean Energy compression subsidiary, in light of our strategy to position that entity as more of a stand-alone organization, able to participate in an industry consolidation, we assessed various asset group, which resulted in $38 million of write-downs and impairments. These assets primarily consisted of older model inventory and legacy intangible assets. We've also taken additional cost-saving measures at Compression Corp, which will benefit both gross margin and SG&A going into 2018. As Andrew discussed, our station rationalization and SG&A reductions are expected to improve our operating results, adjusted EBITDA and operating cash flows. Looking forward, our margins will remain within our range of $0.25 to $0.29, but with a better chance to move to the upper end of the range. Keeping in mind that a penny increase in our effective margin per gallon represents over $3 million in additional operating profit. Our SG&A reductions will take us to around $80 million in total SG&A looking into 2018. Additionally, we expect these actions to also result in positive cash flow from operations in 2018 without any VETC, which we have benefited from historically and our results in operating cash flows. Regarding the third quarter results, our volume grew 8.3% above last year due to growth in CNG while LNG and nonvehicle RNG gallons were flat. For CNG, we saw 10% volume growth led by our refuse and transit sectors. Third quarter Redeem volume delivered was 19.3 million gallons compared to 13.5 million gallons a year ago or a 42% increase. Also keep in mind, this was our second quarter subsequent to the sale of our upstream biomethane assets to BP for $155 million. As I pointed out in previous earnings calls, as a result of the BP transaction, we expected a reduction in revenue of $8 million to $10 million per quarter and a reduction of SG&A expenses of $500,000 per quarter when compared to our first quarter. Our revenue for the third quarter of 2017 was $81.8 million versus $97 million in 2016. Revenue in 2017 was lower due to lower environmental credit revenue of $7.5 million as a result of the BP transaction, and 2017 doesn't include VETC revenue, while 2016 had $6.7 million of VETC revenue. Our construction revenues were down slightly by $1.2 million from a year ago, but still a good quarter for construction revenues at $12.5 million. Our compression revenues were comparable to last year. And while we had $5 million of additional revenue related to volume growth, the effective price per gallon was lower in line with general market conditions versus last year, which offset most of the revenue gains from the volume growth. When looking at our gross margin for the quarter, we recorded inventory valuation provisions of $13.2 million related to our third quarter evaluation of our stations and compression business. When comparing our total gross profit margin for the second quarter of 2017 to 2016, also keep in mind that 2017 did not include VETC and had the lower environmental credits due to the BP sales transaction. Our margin per gasoline gallon equivalent was $0.23. Although we did not record any LCFS credit revenue in the third quarter due to an administrative matter before the California Air Resources Board, LCFS revenue would normally add from $500,000 to $1.5 million in a quarter or $0.01 to $0.02 per gallon to our volume margin. We expect our volume margin to move back into the range of $0.25 to $0.29, assuming we get our LCFS matter resolved adequately. Our SG&A of $24.8 million for the third quarter of 2017 was $1.1 million or 4% lower than a year ago, despite 2017, including an approximately $1.3 million of one-off professional fees and bad debt reserves related to our third quarter actions. Our SG&A is expected to be closer to $23 million for the fourth quarter. Our GAAP net loss for the third quarter of 2017 was $94.1 million, which includes the incremental charges of $74 million compared to a GAAP net loss of $12.6 million in 2016, which had $14 million related to the VETC and higher environmental credit revenues. Our adjusted EBITDA of negative $74.1 million for the third quarter of 2017 was also significantly impacted by the incremental charges of $74 million as well as the additional SG&A of $1.3 million. Adjusted EBITDA of $10.9 million for 2016 included the favorable impacts of VETC and higher environmental credit revenues totaling $14 million. Cash and investments at the end of September were $197 million with $29 million of current debt. With that, operator will open the call to questions.

[Operator Instructions]. The next question comes from Eric Stine with Craig-Hallum.

Great to see the actions taken today. So I was wondering, I mean, lots of moving parts and I apologize lot of numbers in your prepared remarks. So how should we think of the impact to EBITDA? Whether it's on a quarterly or an annual business and it sounds like that this would start in 2018?

Eric, thanks. This is Bob. I appreciate that there are quite a few moving parts on this. And what I'll say on that is looking at even this year, we have a lot of numbers going on with large gains and then these charges and, I think, you can look at this year and even come out to somewhere in the mid-teens in terms of an adjusted EBITDA. But we see that actually next year, probably getting -- approaching $30 million. And so, I'll kind of go there. I think it can -- there's maybe an upside there, but it's -- that's in kind of a range, not a big range and about $30 million is what it is, where we see it going. And [indiscernible] annually, I don't have the quarters kind of broken up. yes, It puts us in a good position from operating cash flow standpoint, which in the past, we have enjoyed the credits from the VETC. So we're doing that without the VETC.

And just to clarify, I believe, Andrew, your expectation was that, I mean, a lot of these volumes will just go elsewhere. I mean, these are not lost volumes. You'll just be -- they'll just be volumes at different stations with your fleet customers. Is that the way we should think about it?

Yes, that's right. I'm not saying that you're going to keep every single gallon. But I would say, you'll keep the vast majority of it. So you won't really have much volume impact at all. We just find that some of these as we built bigger and better stations -- other fleets stations, some of these are lighter duty stations that have really become obsolete and it takes a while to -- for that to become clear. And it takes a while for us to move customers off to other stations that have been built. So really, yes, you're right, Eric. That volume will move off to the rest of the network. We have saved this money, and it drops [indiscernible].

Right. And you were talking about LCFS and nothing in the current quarter. Can you just give some clarity into what you're working through in confidence that whether it's fourth quarter or beginning of 2018? If that matter is resolved, then you can start recognizing [indiscernible].

Yes, It's an administrative matter that's at the ARB, Air Resources Board, and they're required under the regulations and the laws, the low carbon fuel standard to review all the participants like us and how they generate credits in given credit generation activities. And so we're in that process right now. So they've kind of access to hold our account while they take a look at it. So that's what's kind of frozen us for this quarter. We're in active discussions and reviewing activities. This has to do with our plans and other things of how we're generating and what -- the kinds of carbon intensity, frankly, that we are getting. So we think that will get resolved here. This is all kind of new ground, right, and they want to make sure that people are abiding by the rules. We think we are. And so I'm guessing, Eric, that, that should get resolved here in the next month I'm hoping. And we've had several back and forth with them and we're making some progress on it. That will become clearer, I think so.

The next question comes from Rob Brown with Lake Street Capital Markets.

Just some further color on the station closing out. What sort of markets are they? Are they truck stations? Are they cab stations? I mean, can you give us a sense of what types of markets?

Right, they are -- essentially, Rob, they are older stations, many of them have been built by our friends in the utility industry. Over the years, I mean, going back to the very beginning, we've taken over utility networks as a way to really get the franchise. We started that way in Southern California. And we've had a habit over the years of taking network and reducing numbers of stations. High grading those stations, if you will, to get the right ones in the right places. Reusing that equipment. That's the case here. I want to be a little careful because we're working with some of our customers and others right now. We closed stations already as we've said. We've identified all of them to close and we're in the process on some. There are some where we're still working through it. Some of them are in the Northeast, some of them are in Pennsylvania and some of them are in New York. And there are pieces to larger networks where we've since infilled those networks with larger fleet stations. And so we have better stations nearby. That's kind of what's going on. There are 6 stations, which you would consider truck locations that are part of our truck network that we've decided to impair. That doesn't necessarily mean, right, that we've -- we're pulling the station out, but could in the future. But we're impairing 6 of our stations that were truck stations that were in the Rocky Mountains, really in the mountains, mountain of Northwest, where we really as we've looked at it, we need a 15-liter to be able to load those stations -- a 15-liter engine to be able to conquer the hills in those areas. So those are stations that we've taken another hard look at. But for the most part, those will be the only one's that would be truck stops. The rest are really smaller stations that were built for light-duty vehicles that were coming out of utility industry and probably are average 10 years old and something like that.

And then on the port program, you mentioned some activity there. I guess, what's your latest thinking on the port opportunity in the next 2 to 3 years here for nat gas trucks?

Well, it's literally happening the -- you followed it, Rob, a little bit for others on the call. This is an ongoing effort to clean up the port of Los Angeles and Long Beach. It's very large. It focuses on shore power and on ships and on yard, moving equipment and cranes. I think, when you look at it over a longer period of time, this is a $13 billion kind of program. Just to refresh everybody, the Port of LA and Long Beach is the dirtiest air quality in Los Angeles. Los Angeles has the dirtiest air quality in the United States. So it's a problem. And a lot of the problem comes from shifts, but the majority of it comes from the trucks that operate out of the port. So one part of this Clean Air Action Plan is the truck piece. They've been -- we've been working on it very closely with the port commission and the staffs of the port of LA and Long Beach, ARB and Air Quality Management District, all these people that are involved in the trucking associations. This has been underway really for 9 months, I think, started probably even last -- late last year. There's been a draft plan, then there was another draft plan and, essentially, what's been laid out is that by 2035, the vision is that a lot of the shore equipment and crane equipment and automation, loading in ships and all will be electric as well as the vehicles. This is aspirational, I think, but that's been sort of the goal at 2035. Well, we have problem today, right? So now what happens, that's one good goal. So the draft plan that's being discussed, literally as we speak, there's 100s of people down there at the port right now waiting to speak on this issue on the truck part and the other pieces. They're looking at saying that in 2020, there's some technicalities here. But essentially in 2020, if you operate a current diesel truck, you would need to be paying a fee to operate that truck, and the fee is substantial. It's about last time around 10 years ago when this plan, like this went into effect, which by the way changed the entire fleet. So we know this is going to happen at work. So that's when the natural gas trucks went into place down there the first time around. The fee was $35 per container. So you might haul in one move, 2 containers $70, right? So it's an incentive to get your attention if you're operating a diesel. So if you're not operating kind of the cleanest near 0 type of emission standard, that's one of the things that will be worked out. This -- you will pay this fee and we believe that it'll be right now -- the near 0 natural gas trucks will be really the only commercial thing available today to participate. I think, that will probably go into effect 2020. On the other hand, Rob, what it means to us in the shorter term than that is, there's grant money that's been approved in the state of California and a lot of the grant programs that already have been tested in that work is upwards of $550 million and then when you add the $437 million of available VDs -- VW settlement money, you're talking about just a lot of money that's available that's going to be available for natural gas trucks and, frankly, electric trucks, except as you know, you can't get an electric heavy-duty truck today, and maybe not for some time. Upwards of $100,000 of grant money per truck, that money will be available some time in December. And so the next order of business for us and for the ports is to begin to put in place the grant and incentive programs to begin fielding early adopting trucks now. And we'll see some of that occur in 2018 and 2019 as the deadline looms for thousands of these trucks to either be replaced or start paying a fee. So it's big-time volume for us. I would imagine these things have way of little changing, but I would imagine a great number of 16,000 trucks by 2020 -- 2020 and 2021, 2022 will be gone and they'll be replaced by natural gas and probably a few hundred electric perhaps. The majority will be natural gas. They'll be incented and they'll use 10,000. You're talking about 120 million, 130 million gallons a year down there. It'll be also renewable natural gas. So there's great opportunity for us and as that will start here in the next several months, we'll start getting those news trucks, Low NOx trucks are available in March and April, and the grant moneys would be available. So I'd say, come summertime, you'll start seeing some of those trucks roll into the port.

Great. That was a great overview.

That was too detailed I know, but now you know all I know.

That sounds great. And then in general, sort of what's your thoughts on the market trends, diesel fuels going up. You've talked about some additional tax, significant tax that are in California. What sort of the market demand changes more recently with these fuel prices going up in California?

Well, it's interesting. I mean, not a day goes by that you haven't seen more about diesel. And, obviously, with the price of oil scooting up a little bit and certainly with the tax just got put in place on November 1 here in California, you're now seeing the average price in California something like $3.27 for diesel. I think, you'll see another nickel on that actually tonight, overnight, probably sort of could be closer to $3.30, $3.35. So let's move back up always. National prices lowers more like $2.75 to $2.80. So we're beginning to enjoy some room, Rob, with the price advantage again. We're able to offer our customers some good Delta between diesel and natural gas that's beginning to cooperate. But there's a lot of pressure on the diesel industry. I recently got in the last 3, 4 weeks visited with 3 of the largest truck manufacturers, the CEOs of those companies. They're very familiar with the natural gas product. They sell a lot of it now. They'd like to sell more. They're looking at electric alternatives in the future, but they do admit that it's for heavy duty. They see that there could be some room for medium duty or sprinter like delivery vans, but as they look at heavy duty, they know that there's great deal of challenge and they recognize that the natural gas is available today. And they're very interested hearing from the customers about the renewable fees. So we're aware and I think that the natural gas option is going to -- certainly as we start hearing and seeing some more evidence of what's happening with electric, I think that natural gas options going to look that much more appealing and I think the pressure is just -- I think, you're just beginning to see the pressure on diesel. I mean, there is country after country and city after major cities are putting really stringent rules on diesel. And I don't see that stopping.

The next question is from Pavel Molchanov with Raymond James.

As I am sure, you saw the tax bill was just unveiled today in Washington. And there is no mention in there of the VETC, although there are some Clean Energy credits that are getting restored. Any sense of why they would, for example, restore the fuel cell credits? And a few of the other types of ITC, but not the VETC and not the biodiesel?

Yes. I don't know why those are in there -- and for others on the phone, you know the tax reform bill was put out today in the house. It's clear that there's going to be other tax vehicles associated with this, Pavel. So, I think, probably that our peace, you recall, I was going through this, but the VETC is very small compared to some of these other taxes. And it's really been embedded into a bucket of other tax extenders. I guess, our view hasn't changed much since you asked this question last time, is we still -- we -- our envisioning that this bill will deal with corporate and personal income tax rates that probably the work -- the total reform work is not going to be finished. And there's going to be an omnibus type of bill that needs to be done to kind of piece together the other parts of the Tax Code. And I'm guessing that when you get down toward the end here, it's likely that this extender bill will come along that will have some unfinished business in it. Our folks that we're dealing with, still believe that if there is a vehicle like that, that comes along, then there is a good chance that our tax credits will be in there.

Okay. And as for housekeeping item, after your write-down this quarter, what will depreciation and amortization expense come down to? So it's been running around $14 million, $15 million. How low will that get?

Yes. Will probably have -- it'll be around $6 million, $7 million annual impact reduction.

Okay. Got it. Very clear.

So maybe a couple million a quarter kind of thing.

This concludes the question-and-answer session. I would like to turn the floor back over to Andrew Littlefair for closing comments.

Thank you, Operator. Thank you, everyone, for joining us on the call this afternoon. We look forward to updating you on our progress in the next quarter. Thank you.