Clean Energy Fuels Corp. (CLNE) Q1 2019 Earnings Report, Transcript and Summary

Greetings and welcome to Clean Energy Fuels First Quarter 2019 Earnings Conference Call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. It is now my pleasure to introduce your host Mr. Bob Vreeland, Chief Financial Officer. Thank you Mr. Vreeland, you may begin.

Thank you, operator. Earlier this afternoon, Clean Energy released financial results for the first quarter ending March 31, 2019. 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 the Clean Energy's Form 10-Q filed today. These forward-looking statements speak only as 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 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. With that, I will turn the call over to our President and Chief Executive Officer, Andrew Littlefair.

Thank you, Bob. Good afternoon, everyone, and thank you for joining us. I'm pleased to report that the company's operating and financial performance continue to improve through the first quarter of this year with 12% increase in volume, 7.5% growth in revenue and improvement in operating and net income when excluding the alternative fuel tax credit from last year and the non-cash adjustments from 2019. Also importantly the initiatives that began over a year ago to strengthen our balance sheet continue to pay off as we ended the quarter again with cash and investments exceeding debt. Our volume grew over 10 million gallons quarter-over-quarter. We delivered total of 95.2 million with our redeemed renewable natural gas making up over half of that volume increase. Our core business of Refuse and Transits are growth as did our subsidiary NG Advantage and we're optimistic that the heavy duty trucking market will contribute to that growth later this year through our Zero Now financing program. I know there's been a lot of interest in this program. I'm pleased to report that we've begun to sign up fleets are taking into advantage of the offer to lease or purchase heavy duty trucks. These trucks are equipped with the latest natural gas engine technology for the same price as a diesel truck and operate it with a fuel that is renewable and significantly cleaner becomes at a lower cost. As I explained on our last call unlikely year from others we're engaged with fleets that are ready to take delivery of trucks which is different than simply putting down a deposit for a concept truck that won't be ready for delivery for years. Through our Zero Now program, we have agreements with multiple firms which are leasing or purchasing new trucks equipped with Cummins Westport 12-liter ultra-low NOx engine and will be fueling at our existing network of stations with Redeem or renewable natural gas. These company include Tradelink Transport and Supra National Express which operate in the ports of Los Angeles and Long Beach with the latest clean air plant continues to be implemented. Orders for new trucks were also placed through the Zero Now program by the largest bulk carrier Keen [ph] and Advantage group [ph]. Freight Line Express will be taking delivery of new trucks in Northern California and after testing beta versions of the new CWI engine TTSI has placed an order for an additional 40 truck-stop operator in Southern California. In addition to these companies, we're in advance negotiations with several dozen other fleets which represent the potential of orders for hundreds of new natural gas trucks. The media limelight is currently placed on other alternatives like electric and fuel cells including at the recent ACT Expo. But I would like to quote one savvy analyst who has paid very closed attention to this industry for many years. In his report after visiting the floor of the expo, he wrote “Natural gas is the clear cut leader in the clubhouse and where other technologies aspire to be.” The truck companies we've been to speaking to are under pressure to meet lower emissions targets today while maintaining the performance of diesel and the only solution available is natural gas trucks. They've seen stories about recent rollouts of electric buses by few transit agencies that have encountered serious operational issues like the lack of battery range, charging times and ability to climb hills. Albuquerque transits agency experienced with such a disaster they sent back all the electric buses to the manufacturer scrapped the program and are in the process of ordering new natural gas buses. Transit agencies can easily experiment with electric buses because the federal government put the bill for the almost the entire cost. The trucking fleets don't have the luxury of the government covering such cost of experiments. So while others are grabbing easy headlines with big promises of the fuel of the future with very few details. We're signing on trucking firms to solution that tackles air quality and long-term greenhouse gas issues today while giving them the performance they expect at a cost that is less than diesel. As I mentioned earlier, our core business continues to grow at a nice pace. During the first quarter of this year, we signed agreements with a number of transit agencies including BC Transit serving the Vancouver, Canada area which will be introducing 60 new CNG buses that were expected to consumer 720,000 gallons a fuel a year. We've built and maintained three stations for BC Transit. The City of Fresno renewed a contract for the delivery of an anticipated 6 million gallons Redeem to fuel 118 buses. The City of Santa Clarita signed for an estimated 1.9 million annual gallons for 126 buses. The Port of Seattle signed a contract that includes an estimated 400,000 gallons of CNG for airport shuttle buses. LAX report contracted for Redeem to power 31 shuttle buses. Sun Metro in El Paso is adding 40 CNG buses that we will fuel. Los Angeles Metro signed with us to provide an expected 4.8 million gallons of Redeem to power 41 new municipal buses over their life. And the County of Sacramento contracted for Redeem to operate a fleet of school buses and airport vehicles. Finally the County of Orange, Public Works Department signed a five-year fuel deal for an estimated 750,000 of RNG. On the [indiscernible] side, we signed agreement for fuels and service in the first quarter with Livermore Sanitation in California, City of Tacoma, Washington, Alameda County, California, USA Hauling & Recycling in Waterbury, Connecticut. The City of Philadelphia, Cal [ph] Burrtec Waste Industries, the City of Redlands, California and the City of Sacramento, California. All in the first quarter of 2019 was very productive and reinforce our optimism about the future of clean energy and natural gas fueling. Our financial performance and balance sheet continues to improve. The acceptance Redeem is accelerating with existing customers switching from conventional natural gas and new customers are signing up for a renewable fuel that far exceeds climate change goals versus other alternatives. Our core business continues to grow in the heavy duty trucking market which has been a tough nut to crack in the past, has begun to show signs of real progress. Blooming stricter emission standards, higher diesel prices and now away for heavy duty truck fleets to get into a new natural gas fleet for the same price is catching a lot of noise from fleets that were previously reluctant. And with that, I'll hand the call over to Bob.

Thank you Andrew. Our financial results for the first quarter of 2019 were in line with our expectations and we maintain our financial outlook for the full year 2019 which we provided during our year end 2018 earnings calls. Our volume growth in the first quarter of 12% above last year came from CNG and LNG both benefiting from incremental Redeem gallons related to expanded BP relationship. CNG volume also increased as the result of growth at NG Advantage and from our Refuse and Transit sectors. LNG also increased due to greater bulk fuel deliveries compared to a year ago. Redeem volume grew 87% in the first quarter to 34.6 million gallons versus 18.5 million gallons a year ago. Our revenue for the first quarter of 2019 was $77.7 million which included a $5 million non-cash loss on our Zero Now fuel hedge. Last year first quarter revenue of $102.4 million included $25.5 million in alternative fuel tax credits related to the calendar year 2017. The alternative fuel tax credits expired at the end of 2017. Excluding the non-cash Zero Now fuel hedge loss in 2019 and the alternative fuel tax credit revenue in 2018 total revenue increased 7.5% which reflects greater volumes at higher effective prices per gallon driven by RIN and LCFS prices as well as retail pump prices. Our overall gross profit margin in the first quarter of 2019 was $18.9 million which was reduced by $5 million from the non-cash Zero Now fuel hedge loss. Gross margin in the first quarter of 2018 was $47.6 million which was increased by the $25.5 million in alternative fuel tax credit. Exclusive of the $5 million reduction from Zero Now fuel hedge loss and the $25.5 million increase from the alternative fuel tax credit. Our 2019 gross profit margin increased by $1.7 million or 8% from a year ago due to increased volumes offset partially by a decline in station project margins. Our effective margin per gallon was $0.26 per gallon for the first quarter of 2019 consistent with a year ago and within our guidance range of $0.24 to $0.28 per gallon. The first quarter of 2019 benefited primarily from higher Redeem renewable natural gas sales and the related RIN and LCFS credit revenue compared to 2018. Our SG&A in the first quarter of 2019 was $18.4 million versus $18.9 million a year ago. Looking forward we see some increases in quarterly SG&A spending, but for the year we still anticipate being within our expected range of $73 million to $79 million. We also recognized $2.7 million gain related to the sale of station assets. This was part of an eminent domain process to accommodate improvements being made near one of our airport stations. Our GAAP net loss for the first quarter of 2019 was $10.9 million compared to GAAP net income of $12.2 million a year ago. Although last year included the favorable impact of $25.5 million in alternative fuel tax credit income while 2019 was negatively impacted by non-cash loses of $6.6 million related to the Zero Now fuel hedge plus the change in fair value of stock warrants of NG Advantage. We saw the benefits of our lower debt balances in 2019 with interest expense declining by $2.6 million for the quarter compared to a year ago going from $4.5 million in the first quarter of 2018 to $1.9 million in the first quarter of 2019. Our adjusted net loss for the first quarter of 2019 was $2.7 million compared to adjusted net income of $15.6 million in 2018 and our adjusted EBITDA for the first quarter of 2019 was $11.2 million compared to $32.4 million in 2018, noting again that 2018 included $25.5 million in alternative fuel tax credit income. We ended the first quarter of 2019 with $94 million in cash and investments which was essentially the same amount of cash and investments we had at the beginning of the quarter. Cash used in operations in the first quarter of 2019 of $8.2 million was offset with $5.1 million in cash received from our second-year of a five-year earn out from BP and $4.4 million in proceeds received from the station asset sale noted previously. In addition, NG Advantage received $3.4 million in proceeds from equipment financing which we view as an offset against purchase of property and equipment. Our convertible debt due in June 2020 is unchanged at $50 million and our equipment and facility financing debt principally held at NG Advantage is at $36 million. As we see growth in our Zero Now truck program and expansions at NG Advantage to support increased gas flow capabilities we'll likely see an increase in our debt balances during 2019. Keeping in mind, this debt will be directly attributed to contract at volume growth. And with that operator, we'll now open the call to questions.

[Operator Instructions] the first question is from Eric Stine, Craig-Hallum. Please go ahead sir.

This is Aaron [ph] [indiscernible] for Eric, thanks for taking the questions. Maybe first on the Zero Now pipeline good to see and hear some of the recent traction, can you just maybe give a little bit more color on maybe what some of the gaining factors that you're looking for before some of those fleets move forward with some of the larger purchases. And then maybe just talk a little bit about your outlook to get to that. We've kind of been thinking that as around maybe 2,500 truck program to start and maybe the potential to grow beyond that.

Aaron [ph] I'm still - we came up with that 2,500 number because that was just doing math of about $40,000 per truck and our friends at Total had helped us with debt for about $100 million, but I still think it's a good number. It's one that we're shooting for. We've been at it for a while, started in late summer last year. It took us a while what the gaining factors are, it took us a while to basically re-educate fleets. Kind of you think with me on that, what happened was. You have to go back a couple of years, collapse of oil price with really the previous heavy duty engines some of which were the earlier engines and some of the experience was, we had some of the early adopter problems with some of those engines, this of course is now is a new day with the new 12-liter low NOx engine and of course today we have the renewable natural gas. And so when we came out with the Zero Now financing, we needed to go back and really educate fleets about the current state of play. The current engine technology, what was different this time, we had to explain the Zero Now financing and why they could now move into natural gas truck at essentially the same price as diesel, explain the hedge which you know is a very attractive as we've discussed before on this call. Is we're able to lock our customers into a fuel deal at a depending where the operators much as $1 a gallon fixed to EI index for the length of that lease, in many cases four to five years. It's very attractive. This bill takes a while and before we can end up assigning the deals. It takes several steps and then after order the trucks, right? And sign a fuel contract with us, which is new and so I'd like to say there really aren't any showstoppers here. It's really [indiscernible] education and it's one that we've continued to do. We've continued to increase the pipeline so I'm feeling good about that. I monitor it regularly with our Vice President of Sales. And the pipeline continues to grow that is the number of fleets that are entertaining purchases of trucks, but then we have to move through the process, so that release couple of days ago, got you to kind of where we are today and as what I mentioned today, is we've got more than we're in negotiation process with, negotiation and contracting phase today. So I'm feeling pretty good about the way that's going, but - this is buying a real truck for $125,000 committing to five years' worth of fuel, even though it's at a discount. This isn't putting down an order, this is a reservation, this is buying stuff. And so in many cases when we're talking 20 or 30 trucks you're in [indiscernible] millions dollars. So these guys take it seriously, they're faced with higher diesel price today. I note that today diesel in the Port of LA with $4.09 so we have a very competitive price. So I hope that maybe helps. We still - I think 2,500 truck number is a good number though, it will take us the entire year to get to that number and of course you won't see all those volumes this year, but you'll begin to see it in next year.

Great, understood. Thanks for the color there. Maybe second, can you just give an update on some of the programs down there in California, whether it's ports with the SIP or in the South Coast, maybe kind of what you're looking for there kind of near term as far as any kind of funding dollars or truck deployments, that would be great.

Well there's lot of pieces all that, but for those on call that maybe aren't quite as familiar as you're Aaron [ph] of course there's a thing called State Implementation Program, a lot of states have this that are not in compliance certainly the Southern California still has the dirtiest air quality in the nation, we have a plan that we have to get into compliance, I think it's buy 2023 and we're very way short, the inventory of emissions and what we need to do to get in compliance to theoretically continue our federal funding and all that kind of thing. We've got a lot work to do and in fact, at its highest level I think, that the plan would say that you got to get 70,000 heavy duty trucks to like a low NOx and 150,000 medium duty trucks. I don't see any rules or funding or anything in place right now that gets you there. But that just tells me that there are going to be other emissions requirements and other and continued grant funding because 70% of the problem that we have in Southern California is NOx and that's coming from these heavy duty vehicles. All right, so now then if you look at the Clean Air Action Plan which governs the - it's been adopted by the Port of Los Angeles and jointly the Port of Long Beach, those two ports sit side by side there. They adopted a plan that stuff on ships and yard hassling equipment and also of course trucks and this was kind of phase two of the plan because 10 years ago, they cleaned up some of the diesel trucks and introduced natural gas trucks. That still is in place, that plan essentially says that in by 2020 the business as we see it today is not by the way it could go, in order to comply in 2020 you're going to have to either by a near zero natural gas truck or an electric truck. And if you can continue to operate a diesel truck, but they're now working on what the fee will be associated to operate that diesel truck. They're doing some economic analysis to see, how high that fee needs to be, make sure they don't destabilize the competitiveness of the port. I think that's all kind of rocking along. There's a lot of tension there between people that don't want to do things and people that would rather slow this down. I'm betting that it's going to continue to be in place. We see a lot of grants from State of California and even locally to assist in this transition. I think there's close to 400 trucks that have already been granted money that could participate and will participate in this program. A lot of those contracts are in the process in the next month now, so I'm guessing by the latter part of this year we could see a couple hundred to 300, 350 natural gas trucks in the port. These will be early adopters as they rules won't have gone into effect, but I think it will be very nice by the end of the year, if I'm right. You'll have 300 there's about 50 down there right now. So you'll have close to 400 trucks operating, showing what's viable today and why it works and these trucks will be saving money versus the prospect of maybe waiting another five years for an electric truck. So I think all of that's going to happen in the future, in the Port of LA, is if the fee goes in as we expect that there's probably somewhere north of 10,000 trucks over the next couple of three years that will have to be retired. We saw the fee last time around switch the fleet pretty quickly because the Walmart's of the World don't want to pay a fee. They want to hire somebody that's in compliance. So we're very optimistic. We have to use the fueling down the port, we have the product today. We have the grants in place. So I think you're going see this as the beach head for a lot of movement on the, we also run kind of modified Zero Now program for the port too. So that was a lot, I hope that answers your question.

No, that's really good color, we've been kind of hearing some of the stuff there so, so thanks for the detail. And then maybe last, just to kind of model little bit on the station construction line. Can you just talk about how you think that trends the rest of the year and kind of the outlook, the mix there between new stations and upgrades.

I mean it generally trends up as we move through the year. We were - we kind of guided to the $25 million to $30 million range and we still believe we'll get inside that range, it just, it gets can be a little lumpy but generally speaking the activity picks up as we move through the year.

You know, I know Aaron [ph] right now there's about I was talking to our [indiscernible] in charge of this - earlier this morning. You have about 22 stations that are currently in process and there will be more. I think there was two more added in just in the last day or two, our fellas were at the big waste convention and I'm usually - they come back with some of those. So it seems to me that the station of construction line is a little lighter than we've seen it before and I think we've kind of guided to that. It's still robust, but it's not as high as we've seen maybe a couple years ago. I imagined when you shake it all out, it will be somewhere - I'm talking millions, I'm talking about projects now. It will be in the 30, rough 30 projects or so underway here by - in the third quarter, fourth quarter.

All right. Thanks for taking the questions and congrats on another good quarter of volume growth.

The next question is from Rob Brown, Lake Street Capital Markets. Please go ahead sir.

Just wanted to touch on Redeem and that market, how is the volume supply in that market? Are you seeing any constraints there as you grow or do you feel like you got the capacity or contracts place to fill the demand?

I think we're in general balanced right now. We're seeing volume, more supply coming into the market which is a good thing because we're getting more customers come to the party. If you kind of look back over the last couple of years one point we're a little short on supply and then there's been more supply coming to the market. We work with our friends at BP for instance and we're constantly looking at showing them our demand forecast and they're constantly looking at more supply. The market is responding in terms of supply and we're doing our part of the demand side of the equation. We have a lot of customers and areas of the countries but we're not using RNG yet. So we can use more supply and the good news is, that supply is coming. I think we're going to be in general supply balanced for this year. And then a bunch of more supply shows up which will be time linked as we're going to need it.

Okay, great and then in terms of cost structure, you've done a good job of taking it down. Do you feel like you're at a level here that's like where you want to be or do you see it, it's where you see it going?

Well I think what Bob gets worried when you start doing the modeling. I mean I think this is generally this level of SG&A is about right. It's down a little bit this quarter, it may pop up just a little bit, but it's in this range. This feels comfortable for us, we're growing, we're building more stations. We're putting more customers on the - in the program and yet we've been able to kind of hold the line. We're trying to do some things though on the marketing side. We're sure we'll add some a little bit cost that you'll see probably here this next quarter as we promote with shippers and others on the Zero Now program. But I'd say this is generally about the right - we've got it about as tight as we can get it on the SG&A line and I think this is pretty good, don't you Bob?

Yes, I think it's - we're good right now and we're constantly kind of look at that and what we think we need to do support the business and grow the business, so that's why I commented we may not see as lower quarter as we go forward a little bit because we still have work to do on promoting Zero Now and other programs. It takes a lot of effort to be out there promoting what we do.

Great, thank you. I'll turn it over.

There are no further questions at this time. I'd like to turn the floor back over to management for closing remarks.

Thank you operator. I want to thank everyone for listening today in on the call, this afternoon and we look forward to updating you on our progress next quarter. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a good day.