Clean Energy Fuels (NASDAQ:CLNE) Q3 2019 Earnings Call

0:00 Greetings. Welcome to the Clean Energy Fuels Third Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Should anyone require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Robert Vreeland, Chief Financial Officer. Please go ahead.

0:30 Thank you, operator. Earlier this morning, Clean Energy released financial results for the third quarter ending September 30, 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 risk, 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.

1:24 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 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 the company management does not believe are indicative of the company's core business operating results.

2:14 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.

2:53 Thank you, Bob. Good morning, everyone, and thank you for joining us. The adoption of natural gas as a clean transportation fuel continued into the third quarter of this year. Our volume grew a healthy 11% year-over-year to 102.7 million gallons for the quarter. The first quarter in the company's history that we provided over 100 million gallons of natural gas to our customers around the U.S. and Canada. We saw increases in the core markets of rough use in transit as well as a very healthy bump in the trucking sector driven by the redeemed renewable natural gas fueling deal we signed with UPS earlier this year. Our financial operating performance continued to improve in the third quarter as we were delivering more gallons at less cost.

3:40 Revenues of $74.4 million were slightly down from the same quarter of 2018, primarily due to lower revenues from our station construction business, which is very seasonal. Our third quarter adjusted EBITDA was up to $8.5 million with close to $100 million in cash. We believe our overall financial position is strong and it continues to improve. As I mentioned, much of our growth continues to be driven by the demand for a renewable natural gas product, Redeem. In addition to the UPS agreement to purchase the equivalent of 170 million gallons of Redeem over a seven-year period for their stations across the country, we have added additional customers seeking the superior performance in environmental qualities of a renewable non-fossil fuel at a competitive price. The City of Ontario, California signed a five-year Redeem supply contract for approximately 3 million gallons to help meet their sustainability goals.

4:39 Ontario operates a fleet of 88 CNG vehicles, including their first powered asphalt patch truck. One of the largest street sweeping companies in the country, Nationwide Environmental Services, based in Norwalk, California, signed a five-year redeemed supply contract for approximately 1 million gallons for 70 street sweepers. The cities of Redondo Beach and Sacramento, California, also signed contracts to fuel their fleets with an anticipated 1.2 million gallons redeemed between the two. We also recently inked a 10-year agreement to fuel GFL Environmental's fleet of 50 CNG refuse trucks in Denver. That number is expected to grow to 70 by the end of next year as the company's commitment to sustainability continues.

5:26 Ruan Transportation, a national trucking firm, signed a three-year contract for 450,000 gallons of Redeem to operate 20 new CNG heavy-duty trucks. Omnitrans, which provides bus and rail service in San Bernardino, California, signed a five-year O&M agreement for their two stations that will now be dispensing an expected 4 million gallons of redeem every year. We sold 110 million gallons of redeem in 2018 and expect that the number to grow approximately 30% in 2019. We have been able to do so because of the agreement that we signed late last year with BP, one of the world's largest energy companies. This co-marketing agreement with BP has enabled us to access BP's extended network of R&G producers as more and more fleets are asking for the fuel that produces at least 70% less carbon than diesel.

6:21 Clean Energy has the largest natural gas fueling infrastructure in the country and fortunately has an important relationship with North America's largest supplier of R&G. I'd like to give you an update on the effort to sign heavy-duty truck fleets. I hope you saw our press release a few weeks ago announcing that over 100 new natural gas trucks have been delivered to firms that operate out of the ports of Los Angeles and Long Beach. As we've discussed in the past, the ports are in the process of implementing a new clean air program that calls for doing away with old, dirty diesel trucks that operate there. The delivery of these new 100 trucks is significant because it is an affirmation by these firms that natural gas is the best alternative to meet The more restrictive emission standards while maintaining the high performance that they need.

7:12 Most of the firms participated in a pilot program late last year and early this year, testing the new Cummins Westport 12-liter near-zero engines. After a successful year of testing the trucks, they have now begun to add new trucks to their fleets. I think this is a strong sign for the new 12-liter engine and in the confidence of natural gases of fuel. Policymakers in California continue to understand that natural gas is a good solution to address the state's ongoing emissions problem. Last week, the South Coast Air Quality Management District proposed a bill to impose a half-cent sales tax to help fund cleaner-burning heavy-duty trucks. They noted that if the bill passes, that most of the money should go to what they refer to as near-zero trucks, and natural gas fits that definition.

8:01 The AQMD realizes that the results of getting more natural gas trucks on the road now would have a greater and more immediate impact on air quality and reducing NOx versus waiting for other technologies like electric to advance to commercialization. We also continue to have success with our Zero Now program, which helps fleets get into new natural gas trucks for the same price as diesel trucks while saving on the price of the fuel. We just struck a deal with one of the largest trucking companies in the country, and I look forward to sharing more details when I'm able to in the near future. The company is in the process of ordering 200 new heavy-duty trucks equipped with new Cummins Westport 12-liter natural gas engines. The 200 truck order is in addition to 20 other natural gas trucks that the company ordered earlier this year, which are beginning to be delivered now. demonstrating their commitment to natural gas.

8:59 In addition to this large single order, our Zero Now program has recently shown other results. Ecology Auto Parts ordered 46 trucks that will be fueling at Irvine, California Station. Trademark Transport, which is a carrier that operates out of the Port of Long Beach, has now ordered 20 trucks through the Zero Now program. Key Heat Distributors, a leading carrier in the food industry, has just signed a Zero Now deal and will be purchasing their first natural gas trucks which will fuel at our existing Fontana, California station. I would also like to highlight something that I'm sure most of you saw last month. UPS's announcement that it would be spending $450 million over the next few years on thousands of additional heavy duty natural gas trucks and infrastructure is very significant on many levels.

9:51 In their own words, UPS, one of the world's largest Leading Logistics Company states that the use of CNG is, quote, no longer in the test or experimental phase, but rather in the mainstream. This means they are so pleased with the performance and cost of operating their current large CNG fleet that they have decided to significantly expand it. They also pointed out that the price stability of CNG versus diesel plays a large role in why they continue to purchase CNG trucks. said that this big addition to their CNG truck fleet can be easily deployed across the U.S. and Canada. And while the UPS announcement was not part of our Zero Now program, we will be providing much of the fuel.

10:36 As I've pointed out in the past, other alternatives in the heavy-duty truck market are currently getting the lion's share of the media attention, particularly electric. But none could come close to meeting the claims the UPS made about their very large expansion of their CNG fleet. Natural gas is the only fuel choice today that can meet stricter emission standards, help to address long-term climate change issues with R&G, costs less than the incumbent diesel, and most importantly, provides demanding fleet operators the performance they are used to. We believe the momentum towards natural gas and the heavy-duty truck market is on the verge of really accelerating. Not only are we seeing it in response to our Zero Now offering, but another example took place last week in Indianapolis.

11:22 were Cummins hosted a natural gas engine technology forum. 200 people representing over 50 fleets attended on their own dime to learn about operating a natural gas heavy duty truck fleet. Cummins was so pleased with the turnout and the reception of this first time event that they have already scheduled a similar gathering early next year that will target the shipper community as well as public policy makers. The third quarter of this year proved to be a good one with solid volume growth driven by all markets. We also continue to effectively manage our balance sheet by keeping our spending and capital expenditures at levels that allow us to continue selling more and more fuel, but are also in line with our goal to reach net income profitability.

12:07 And with that, I will hand the call over to Bob. Thank you, Andrew.

12:12 It was another good quarter with improvements in our operating margins and net results on a year-over-year basis due to continued volume growth on lower spending. which has also allowed us to keep a good cash position. And we remain on track to achieve low double-digit volume growth for the full year 2019. I'll also point out our results improved despite low rent prices throughout the third quarter. On our last earnings call, I noted there was a significant decline in rent prices that began in June, which did not materially impact our second quarter results. But without any meaningful recovery in RIN prices during the third quarter, our product gross margins were lower by approximately $2 million.

12:59 On the other hand, LCFS prices have remained at higher prices thus far in 2019, and we expect that to be the case going into the foreseeable future. And higher LCFS pricing is also beneficial to our BP earn out that is determined at year end. While we believe rent prices will increase in due course, it's likely rent prices will remain low in the near term, which will negatively affect our fourth quarter operating results by an amount similar to the third quarter. What helped to offset the impact of the lower rent pricing is our volume growth. Our volume growth of 11% in the third quarter compared to last year came principally from C&G, while L&G volumes were slightly less than a year ago.

13:45 We continue to benefit from our growth in the delivery of Redeem even in a low RIN price market, particularly under our new UPS contract as well as the many other customers that are creating incremental demand for our renewable transportation fuel. Redeem volume grew 32% in the third quarter to 37.4 million gallons versus 28.3 million gallons a year ago. Our revenue for the second quarter of 2019 of $74.4 million included a $1.1 million non-cash gain on our Zero Now fuel hedge. Last year's second quarter revenue was $77.3 million, which included $9.4 million in station construction revenues versus $6.4 million of station construction revenues in 2019, which was in line with our expectations.

14:38 Our volume-related revenue, exclusive of the fuel hedge gain, was essentially flat year over year. Incremental revenue from our volume growth was offset by a lower effective price per gallon due to falling natural gas prices, the decline in RIM prices, and changes in the mix of fuel sales due to the various fuel types sold and geographies in which we sell fuel. Our effective price per gallon in the third quarter of 2015 for all volumes delivered was $0.65 per gallon compared to an effective price of $0.73 per gallon delivered in the third quarter of 2018, which has a nearly $8 million negative effect on revenue year over year. But as I've pointed out in the past, to the extent our revenue is lowered by the effect of lower natural gas prices, we also see a benefit in lower commodity costs of goods sold, and thus we do not experience an equal effect on our margin per gallon from a drop in our effective sales price per gallon.

15:37 Given our view on RIN pricing remaining low in the near term, we see an effective price per gallon on all volumes delivered for the fourth quarter to be in the range of 62 to 65 cents per gallon, assuming no other major price moves in the RIN and LCFS credits. Given these circumstances, total revenues for the fourth quarter of 2019, including construction sales, should be in the low to mid $70 million range. Our overall gross profit margin in the third quarter of 2019 was $24.5 million, which benefited from the $1.1 million non-cash zero now fuel hedge gain. Gross margin in the third quarter of 2018 was $24.5 million. Our effective margin per gallon was $0.22 for the third quarter of 2019 compared to last year at $0.26 per gallon.

16:34 The lower RIN prices made up Thank you for joining us. Our SG&A in the third quarter of 2019 was $17.6 million versus $18.4 million a year ago. We continue to trend toward the bottom of our range of $73 to $79 million for the year.

17:22 Our gap net loss for the third quarter of 2019 was $4.3 million compared to a gap net loss of $10.9 million a year ago. This improvement in our net results was driven principally by better operating margins and lower interest expense. Our interest expense declined by 2.4 million for the third quarter compared to a year ago, bringing the year-to-date decline in interest expense to 7.7 million compared to last year. Our adjusted net loss for the third quarter of 2019 was 5 million compared to an adjusted net loss of 9.2 million in 2018. and our adjusted EBITDA for the third quarter of 2019 was $8.5 million compared to $7.3 million in 2018.

18:14 We ended the third quarter with $99 million in cash and investments and debt of $83 million and we're still anticipating increases in both capital expenditures and debt in the near term to support our volume growth initiatives. And with that, operator, we'll now open the call to questions. Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions.

19:05 The first question is from Eric Stein of Craig Hallam. Please go ahead.

19:10 Yeah, hi, good morning. It's Aaron Spahalon for Eric. Thanks for taking the questions. Hello, Aaron. Maybe first for us, you gave some good details, Andrew, on kind of testing and some of the funding in the ports. Can you just maybe give us a A little more detail there and maybe size the opportunity for us over the next couple of years as we hit critical mass

19:29 there. Right. You know, as I've discussed before, the port has, oh gosh, somewhere between 12,000 and 15,000 trucks. And this Clean Air Action Plan is, you know, beginning to get phased in. They're going through the sort of the final throws of the policy to decide on what the container fee will be, which goes into effect next year. They're doing those studies now. They've done some feasibility studies in terms of natural gas and electric. As you can imagine, both natural gas and electric have qualified. They're trying to determine right now. Both ports are working with staff to try to figure out just what is the container fee.

20:14 This would be a fee. If you continue to operate a diesel truck rather than a natural gas or an electric truck, that would be assessed on each container. And it can range anywhere from $30, $35 per container. Most trucks haul two containers. So it's $70 a move. It's important to note that this fee is often is, you know, Walmart, for instance, is picking on them. They don't want to pay that fee. They assume the trucker is going to take care of that. So we saw 10 years ago in the first rendition of this Clean Air Action Plan that the older, at that time much older, diesel fleet was replaced.

21:11 The fee Necessitated that these truckers really had to get rid of the dirty diesel trucks and either add in those days natural gas or a newer diesel. And at that time, about 1,500 natural gas trucks, this is almost 10 or 11 years ago, came into the port, as did about, oh gosh, 8,000 to 10,000 new diesel trucks. And so we think that there will be a fee that will be in that range. There's a lot of fighting over it depending on those that don't want a fee and those that don't want a high fee and would rather have a lower fee and making sure that the port doesn't deposition itself in terms of commerce.

21:59 But we expect that in the latter part of this year that that fee will be – become public. It'll be discussed more and it'll be phased in next year. So I think you should expect over the next couple years that the lion's share of the fleet in the port will either move to natural gas or electric. And those are really the two options before them. And so I How that exactly phases in, I'm not sure. I imagine that in 2021, by the summer, it'll all be kind of in effect. I'm sorry, 2020, that's next year. By the summer, it'll be in effect.

22:48 I imagine you'll see a few thousand trucks begin to change and then more in 2021 and finish out in the latter summer of 2022. So I think 10,000 to 12,000 trucks will change, and I happen to be optimistic that natural gas will get a, since it's really the only game in town so far, the only engines that are proven and are economic, I think it'll get the lion's share. So we're very optimistic. As you know, we have fueling stations there. I felt good that even before these regulations had gone into effect, we completed the successful test of 20 units earlier this year. As I mentioned in my remarks, now people are taking or now that participated in that test, believed in it, that went so well that are beginning to buy trucks. We've seen about 300 trucks or it could be a little more than that have put in for grant funding for more natural gas trucks.

23:51 So I like the fact that we're going to have a lot of experience by the latter part of this year, early next year, for 500 trucks already operating in natural gas. And I think that really sets the stage well as we begin to compete against electric or what have you as the port begins to change.

24:10 Good, good. Thanks for the color there. We'll stay tuned. Second, you know, for me, can you just kind of talk about You know, as we start to see more kind of clean fuel programs and LCFS programs outside of California, can you just kind of talk about the outlook to expand Redeem into other

24:26 markets? Well, you know, we're in other markets, and I'd look here to Bob if he knows off the top of the head. I'm thinking I'm right. I think we're actually moving Redeem right now into 20 states. Yeah. And so we have moved it. Now, you know, look, we're a little constrained still by supply. There's a lot of supply coming on. Now, this... This lowering of the RIN price hasn't helped some of the new projects that we've seen, but I believe that the industry had thought that there was about $2 billion worth of renewable natural gas projects across the country that were kind of getting ready to start. This RIN pricing coming down from, gosh, in the high, mid $1 range, We think that the ren pricing will move up again.

25:42 and a lot of these projects will kind of go from a yellow light and begin. But there's a lot of projects around the country and so there's more supply coming. And importantly, we're starting to see the first, there's a lot of talk about it, dairy farms. Everybody's talking about renewable natural gas coming from dairy farms. And that's really important because it's so powerful, because it's so clean, it's so low on carbon. Today we're at 70% less carbon. Gosh, when you get to using dairy fuel, dairy farm fuel, gosh, it's like 200%, 250% less. So it's very powerful.

26:28 We're just seeing those dairy projects coming online, and it's really going to be the future, and it's very exciting because it really makes our fuel very clean. I mean, dramatically cleaner than electric. When you couple that with low NOx on the 12-liter engine, which is 90% less NOx, and then you put it with dairy fuel, renewable fuel, it's not fossil, it's strong. We're seeing a lot of that. Eventually, you'll have another couple billion gallons of RNG move into the market, and then the 20 states will grow. We're already moving. R&G to Republic and lots of different parts of the country, Republic Industries, the number two refuse company in the United States and in many states.

27:16 So we think it's the future. We're well positioned on it. It gives natural gas a leg up because it makes it a renewable fuel and you can blend it or use it all together. You know, all of our stations in California are using renewable natural gas.

27:32 Right, right. Okay. Good. Thanks for the caller, and I'll hop back into the queue. Congrats. Okay, thanks. The next question is from Rob Brown of Lake Street Capital Markets. Please go ahead.

27:46 Good morning.

27:47 Good morning, Rob.

27:50 On your redeem ramp with UPS, remind us again where that's at, how much further to go there?

27:56 Well, it started out pretty strong, and I think we were at 18 million gallons or so for this year, run rate, but then it picks up from there. Am I right?

28:08 Yeah, yeah, yeah. Yeah, so it was, we started, yeah, the ramp, you know, the ramp in this quarter was close to a full ramp.

28:18 Yeah, yeah.

28:20 On that, so we kind of started in, I believe it was April.

28:24 Yeah. And so this third quarter... We're, you know, we're kind of fully there. You know, a little bit of ebb and flow, but frankly, it's flowing.

28:37 Okay, great. Excellent. And then the Zero Now program, you listed a number of trucks, I think, over 300 that are sort of being ordered. What's the latest in getting those orders in place and heading into 2020?

28:50 Well, those orders, I mean, you know, knock on wood, unless something happens here, those orders are in. I mean, they're going in right now. So I think you can put those in the bank, Rob. So we're seeing a pickup. So those are, in addition, those are new since we talked about it and we haven't announced those. We'll give more color. You know, some of our fleets don't like us to announce these things until they're good and ready. And I understand that they see it as a competitive advantage, but We're beginning to see pickup. I would say that, you know what's important, the way I looked at this? The whole zero now took a little bit longer than I would have liked. There was a little bit more education. You know, when we kind of rolled back a couple years ago, when we had the decline in oil price, people stopped looking at natural gas for a little while because the economics got a little bit more challenging. We had to then come back and make sure they understood now this new engine. This new engine has performed really well.

29:49 It's Lower Knox and we had some work to do to make sure everybody understood that it was the second generation engine and that it had increased testing and that it was very reliable and we feel good about that. Rob, what I think is important for the people on the call to understand is we kind of went from a period of getting people to try five trucks. Now this 200 truck order, that's a big order. And you know As I mentioned in my remarks, the UPS announcement didn't participate in our financing of the Zero now, but we are, of course, selling them an awful lot of their fuel. Look, that's significant. I don't know that we know the exact number of heavy duty versus some of the package delivery and that press release that they made, but I'm thinking it's very close to something over the next few years of 5,000 trucks.

30:45 So what we saw in the refuse sector is this very phenomenon where we go from a testing cycle to something that's more like a normal purchase cycle. And then you begin to get into a period like we have now with waste management where 90% of their annual purchases are natural gas. And I don't know exactly where we'll be because I'm not an expert on that and it's not for me to to know exactly. But, you know, UPS is approaching somewhere in their kind of more normal purchase cycles year over year buying natural gas. And so we've left the test phase, and it's, as they said, it's more than the mainstream now. And, you know, this announcement that I made this morning of the 200, that fleet buys more than 200, but that's a large purchase.

31:37 You know, you're looking at... 200 times $150,000, right, on those trucks. So it's a large purchase for them. And that, I take, is a very good sign as we're seeing 20s and 46s in this 200. We're beginning to – fleets are beginning to gain confidence. And that's new with this new engine here this year. And I think the Zero Now is helping that, by the way.

32:09 Okay. Okay, great.

32:10 Great. And then how do you see volume growth shaping up into 2020? I think you said double digits this year. How is next year kind of looking?

32:20 Well, I'm not going to say that right now, Rob, but I would like to think that the benefit that we're seeing now from zero now would grow in 2020. I mean, you know, we we would like to think that this market is off and running. And so, you know, I would hope that we're going to see an improvement. I mean, a lot of our business is growing well, right? Our refuse and our transit, there's sort of limitations in that business, but it has been growing at about the double digits. Trucking has an ability, if we get the acceptance and the adoption like we would hope and we think we're seeing, it can come up way above that and get into more significant volume growth. And that's what we're hoping for, and we You know, at some point in the next quarter or so, we'll give a little bit more color about what we see. I would think, though, it should be stronger, unless something happens to the economy or something else, it should be stronger than it is this year.

33:23 Okay, great. Thank you. I'll turn it over. Okay. The next question is from Pavel Malkanov of Raymond James. Please go ahead.

33:33 Hey guys, good morning. This is Mohamed Ghulam on behalf of Pavel Molchanov. Thanks for taking the questions.

33:38 Hi Mohamed.

33:40 So let me start by asking a thematic question about Canada. Now that Trudeau has been re-elected, we know that the carbon tax is going to remain in place. I'm curious, in that context, do you guys see any upside for demand from the Canadian market?

33:55 We do. You know, we finished a few stations up there on that important corridor that one of those stations outside Ontario is loading now. They have a couple of programs that are beginning to be put in place that are grant programs that I think could move significant volume. And so we feel good about Canada. You know, Canada took a An early lead in the natural gas vehicle program years ago, and then it kind of went into about a 10-year sort of hiatus, and it's back. And we've added some stations along that corridor. And so, yeah, we're feeling pretty good about what's going on in Canada.

34:43 Okay, a similar question about Oregon and their low carbon fuel standard. Obviously, a much newer program than California. I'm curious, do you see any demand based on that?

34:54 It's starting and it's smaller. We are selling some fuel up there. I don't know off the top of my head exactly what percentage of it is, but it's small. I think Washington's coming on board as well. There's been talk about this in New York State. I don't know exactly where that stands right now. We're a little limited on some R&G supply right now, and a lot of it wants to find its way to California because of the advantageous low-carbon fuel standard. You know, the low-carbon fuel standard worked, and it's created a lot of supply that's moving right now to California, but I think these other states, as you mentioned, Oregon and others, will... You know, the state's not as big, and the fleets aren't...

35:45 There's not as much up there, but... It has a way of stimulating the growth of R&G, no doubt. Okay, that's all for me. Thank you. Thank you, Amman. We have reached the end of the question and answer session, and I will now turn the call back over to Mr. Littlefair, President and Chief Executive Officer, for closing remarks.

36:09 Thank you, Operator. We want to thank everyone for listening in the call this morning and look forward to updating you on our progress next quarter. This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.