Clean Energy Fuels Corp.
Q1 2017 Earnings Call Transcript

Published: 4 May 2017

[Operator:]

Greetings and welcome to the Clean Energy Fuels First Quarter 2017 Earnings Conference Call. At this time, all participants are in a 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, Tony Kritzer, Director of Investor Relations for Clean Energy Fuels. Thank you, Mr. Kritzer, you may begin.

[Tony Kritzer:]

Thank you, operator. Earlier this afternoon, Clean Energy released financial results for the first quarter ending March 31, 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 the Clean Energy’s Form 10-K filed May 04, 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 exclude certain expenses that the company's management does not believe are indicative of the company's core business operating results. Non-GAAP financial measures should be considered in addition to results prepared in accordance with GAAP and should not be considered as a substitute for or superior to GAAP results. The directly comparable GAAP information, reasons why management uses non-GAAP information, a definition of non-GAAP EPS and adjusted EBITDA, and a reconciliation between these non-GAAP and GAAP figures is provided in the company's press release, which has been furnished to the SEC on Form 8-K today. Participating on today's call from the company is President and Chief Executive Officer, Andrew Littlefair; and Chief Financial Officer, Bob Vreeland. And with that, I will turn the call over to Andrew.

[Andrew Littlefair:]

Thank you, Tony. Good afternoon everyone and thank you for joining us. I’m pleased to review our first quarter 2017 results. We delivered 85.1 million gallons to our customers in the first quarter a 10% increase over 77.5 million gallons we delivered in the first quarter of 2016. Revenue in the first quarter was $89.5 million which did not include any VTEC contribution which benefited last year's number. Our volume related revenue was up 9% and we still have a solid construction project pipeline. However, our construction revenue was down in the quarter due to timing and more station upgrades. We generated $80.7 million of adjusted EBITDA which included gains from our debt repurchase and our transaction with BP. Even when backing out the gains our adjusted EBITDA was $6.9 million. This was our seventh consecutive quarter of positive adjusted EBITDA. We made one of the company's more significant transactions in the first quarter of this year, the sale of the upstream portion of our renewable natural gas business to BP for $155 million with an earn out of up to additional $25 million. Plus BP absorbed $9 million of debt from the renewals business. There are many positive aspects of this partnership with BP. Specifically we continue to be in the renewables business doing what we do best, marketing and selling our Redeem fuel throughout our extensive fueling network. Our partnership also includes a long-term supply contract and royalty sharing agreement with BP allowing us to continue aggressively selling redeemed to our customers who are looking to benefit from operating their fleets on the cleanest fuel available. In fact that the end of April we signed the largest Redeem agreement since we launched in 2013. Our longtime customer, Republic Services will expand its use of Redeem to 28 of their facilities throughout 18 states across the country. This expands Clean Energy's Redeem network to a total of 20 states. By switching an anticipated 23 million gallons of natural gas fuel a year to Redeem Republic is expected to reduce their greenhouse gas emissions by over 141,000 metric tons a year. We congratulate Republic Services for their vision and environmental leadership. Redeem volumes grew in 2016 by almost 25% to roughly 60 million gallons and we plan for it to grow another 25% in 2017. Switching to our capital structure in the first quarter we reduced our debt by an additional $57 million bringing it down to its current level of $257 million and on April 03, we added $123 million of cash to bring our cash and investments to $221 million. Looking out to our 2018 debt maturities we plan to be opportunistic with the timing of our repayment and the majority of the proceeds from the BP transaction are earmarked for debt repayment. For 2017 we remain on track with our CapEx budget of $22 million with an additional €7 million for growth projects at our NG Advantage subsidiary. On the public policy front we are working with a broad coalition of industry organizations and environmental groups while the ports of Los Angeles and Long Beach are dropping their clean air action plan. The plan must address their urgent need to improve the extremely poor air quality at the busiest port system in the country. The easiest and most cost effective and quickest way for them to do this is to encourage or require the thousands of trucks which come in and out of the ports every day to convert to the new zero emission natural gas engine from Cummins Westport. As you know, over the decades California has been the catalyst for ways in which the entire country eventually has addressed pollution problems and we believe what the ports of LA and Long Beach are considering today could be that same type of catalyst for the heavy duty trucking industry. We will keep you posted as this continues to develop over the next few months. An exciting development has quietly been taking place in Canada. The federal and provincial governments have become very supportive of natural gas vehicle deployment providing grants for stations and other incentives for fleet adoption. For example, the Government of British Columbia is offering incentives to cover up 80% of the incremental cost for new medium and heavy duty NGVs. Additionally, the Government of Ontario plans to launch the Green Commercial Vehicle program in 2017 which will include up to a $170 million in incentives for adopting natural gas and other alternative fuel vehicles. And the Government of Québec is providing grants that will cover up to 30% of the incremental costs of the medium or heavy duty natural gas vehicle. We currently operate 20 stations across Canada and we recently won 2 contracts in British Columbia to design and build additional CNG transit stations for TransLink and BC Transit and expect to build four more truck stops stations for our partners and fleets along key corridors in Ontario. Finally, I like to address the attention received from the recent announcements about the potential launch of electric heavy duty trucks. These announcements put a major spotlight on the need to move away from diesel by using an alternative fuel to lower emissions and greenhouse gases. That's a positive sign and in line with our mission. However, it has been interesting to see that some in the Trade Press have finally begun to ask the same hard questions that we have had to answer when we introduced the idea of heavy duty trucks fueling with natural gas. How much will electric trucks cost? Where is the network of charging stations? What will be the freight capacity? What will be the freight capacity loss due to significant weight of the batteries? What is the range? And when will these trucks actually be commercially available? As of today there have not been any credible answers to these questions. I would like to remind everyone that our natural gas solution of Redeem renewable natural gas combined with the zero emission engine from Cummins Westport is the clean or even cleaner as a proposed electric truck, it's economical. There is an existing robust fueling infrastructure. The trucks meet the demanding duty cycle and most importantly they are available today. The air quality in major cities around the world like London, Paris and Mexico City today are in crisis mode caused in major part by the use of diesel fuel. A recent study by the World Health Organization declared that diesel exhaust was a carcinogen that causes lung cancer and is in the same category as the [indiscernible]. A different report was just released that said Southern California exceeded the Federal Health Standard for ozone during 132 days last year. And again one of the biggest culprits was heavy duty trucks operating on diesel. Public officials and other groups are realizing we cannot wait for a pie-in-the-sky option that may or may not come. We understand that no single alternative fuel solution is going to capture the entire heavy duty truck market which burns over 30 billion gallons of diesel each year in the U.S. But more than ever, clean natural gas transportation fuel is being turned to as the answer. And with that, I'll turn the call over to Bob.

[Bob Vreeland:]

Thank you, Andrew and good afternoon to everyone. I'll comment on our first quarter and then highlight again the anticipated impacts to our financial model considering the sale of our RNG production assets to BP. In the first quarter we saw volume growth of approximately 10% versus a year ago resulting from growth in CNG and LNG gallons offset partially by lower non-vehicle RNG gallons. For CNG we saw 12% volume growth led by our refuse and transit sectors. The LNG gallon increase of 600,000 gallons was bulk supply and refuse related. Our non-vehicle RNG gallons declined as a result of selling more Redeem gallons into our vehicle fueling network. Redeem volume for the first quarter was $14.1 million gallons. Our revenue for the first quarter of 2017 was $89.5 million. In 2016 our revenue was $95.8 million. However 2016 included $6.4 million of VETC revenue and there is no VETC in 2017 due to its expiration at the end of 2016. Our volume related revenue of $73.6 million was up 9% over 2016 principally related to our increased volume, despite a slight decline in our effective price per gallon. Our compressor business revenues stabilized and were up from the more recent third and fourth quarters of 2016, although the global compressor market remained soft. Our construction revenues were down from a year ago which is related to the type of project and the timing of construction activities. 2016 was a busy year for full station builds particularly in the latter half of 2016 when we completed our NICE Bus and FedEx stations for over $11 million combined in construction revenue. The other point I'll make here is our first quarter revenue included the full quarter of our RNG production business and related RIN and LCFS credits since the sale to BP closed at the end of the first quarter. Going forward our revenues will be impacted by the sale of our RNG production assets and the royalty arrangement with BP. When comparing our gross profit margin for the first quarter of 2017 to 2016 keep in mind that the 2016 gross profit margin includes $6.4 million of VETC and 2017 has no VETC. Excluding VETC our gross margin was down about $1.5 million year-over-year with about $1 million of that related to our lower construction product revenue. Effective margin per gallon for the first quarter was $0.32 per gallon compared to $0.36 a year ago. Last year benefited from much lower natural gas prices compared to the first quarter of 2017. Our SG&A of $23.8 million in the first quarter of 2017 was $1.8 million or 7.1% lower than a year ago and also represents further savings from more recent quarters. We're seeing the results of our cost saving actions that we took in the fourth quarter of last year. We expect additional savings in SG&A associated with our sale to BP of our RNG production assets. We also recorded a gain of $3.2 million from the retirement of $25 million of convertible debt during the first quarter of 2017. In 2016 gains from the repurchase of debt in the first quarter amounted to $15.9 million. Our sale transaction with BP resulted in a gain of $70.6 million which included approximately $27 million in goodwill write off which is an allocation required under Generally Accepted Accounting Principles. Our cash gain was approximately $100 million. Our GAAP net income for the first quarter of 2017 was $61.1 million compared to GAAP net income of $2.8 million in 2016 keeping in mind 2016 had $6.4 million of VETC that didn't exist in 2017 as well as the impact of the gains in both periods. Our adjusted EBITDA for the first quarter of 2017 was $80.7 million compared to $29.7 million in 2016, again noting that 2016 benefited from the VETC revenue and both areas were impacted by the gains. As Andrew mentioned at March 31 our debt balance was $257 million, only $4 million of that is due within the next 12 months. A portion of our convertible debt due in the second half of 2018 is $135 million and we're beginning the second quarter with $221 million of cash and investments. Regarding the impact of the sale of our RNG production assets to BP as we discussed on our last call we anticipate our effective margin per gallon to be in the range of $0.25 to $0.29 per gallon on a go forward basis. I also indicated revenues and cost of sales would be impacted. More specifically on revenue on a go forward basis our effective revenue per gallon is expected to range from $0.72 to $0.77 per gallon given current market conditions. In 2016 our effective price per gallon ranged from $0.84 to $0.88 per gallon and was $0.87 in the first quarter of 2017. This could have an $8 million to $10 million impact on revenue for a quarter. Volume growth will mitigate some of the impact to revenue from a decline in our effective price per gallon. Also the full impact of the reduction in our effective price per gallon does not flow through to our effective margin per gallon as there are cost savings associated with the production plants being acquired by BP. For SG&A we still estimate annual savings associated with the BP transaction of around $2 million or approximately $500,000 per quarter going forward. This is in addition to savings we saw in the first quarter. And with that operator we will open the call for questions.

[Operator:]

Thank you. [Operator Instructions] Our first question is from the line of Eric Stine with Craig Hallum. Please proceed with your questions.

[Eric Stine:]

Hi everyone, congrats on the Republic deal.

[Andrew Littlefair:]

Thank you.

[Eric Stine:]

I just wanted to stick with Redeem and just kind of focus on what you think that can do to accelerate your growth since you've got the supply lockdown, I mean maybe first just something so we can track you going forward but number of fleets that are using Redeem now and then also when you're thinking about the large fleets and you mentioned Republic but you've also got UPS and FedEx. Right now what percentage of those fleets do you estimate you are fueling and where you think that can go?

[Andrew Littlefair:]

You know Eric, and I know you were, I believe you were out at the – conference in California. This notion of renewable natural gas I think is really beginning to take hold. It differentiates us, our product natural gas. It really moves us into the realm of sustainability. And it gets our fuel combined with this new zero emission engine to really cleaner, really and I've said this now for a year or so, but I think people are beginning to recognize and it's really commercially the most cleanest fuel available today, cleaner than electric. And so some of our most significant fleets as you mentioned, Kroger in there and UPS, FedEx and now Republic, they get this. They understand it's very valuable. A lot of the shippers, Home Depot and others some of the larger shipper guys that we work with they all understand it too and they really like it. It really helps them on their sustainability goal. And we have great – we're very optimistic and we think the Redeem fuel renewable gas has great reach. We see the industry and the production side, you're right, we have a nice deal of supply locked down with BP which we're very pleased about. We see a great deal of supply coming on and we see demand. I think this Republic announcement today is important because it reaches us out into 20 other states in a word or more than that I guess we're at three states today, but we'll be getting to move out across the country moving this fuel to these fleets. And so we've just really scratched the surface on this. There is no reason why that some of our largest fleets operating all across the county can't avail themselves of this fuel and we're very optimistic about it. So we've got our hand full of some of our most sophisticated largest fleets working with now but as you know we've got more and more of our transit properties and now our largest thrash guys. Our interest is in doing it and so those people they know natural gas are beginning to take delivery of the newest, cleanest engine, the zero emission engine that we've all talked about and now they are rolling with the Redeem fuel as well. So it's a great combination. We expect that the renewable piece to continue to grow now ramp up here in the future. We'll see another as I said in my prepared remarks 25% this year, but I think it should as we expand out across the country it should ramp even more. It seems to be Eric a hot product right now.

[Eric Stine:]

Yes, definitely and I was after that, and that just gets to my next question, because I know, I mean there's a lot going on in California and you've got this ongoing debate certainly at [indiscernible]. People get the significance of natural gas and the new zero engine. Just wondering in terms of policy makers and regulators, are they starting to get that message or is it still something where you are fighting the fact that you've got a lot of claims or just people talking a lot about electric and other technologies?

[Andrew Littlefair:]

Well look, there is no doubt that there's a romance around the electric vehicle and let's just give everybody their due. The people believe that that is it's obviously a spiritual argument that they really believe that the zero, the electric vehicle is zero. Well it turns out that our fuel is actually cleaner than theirs someday electric truck and we're ready to go today. I would though the sort of empowered clean air folks certainly in Sacramento have a bias toward electric, but the fact is that we have a more economic product that is available today that's actually cleaner is kind of screwing up there what they've been telling everybody. And so I believe it's beginning to take notice. Now I'll say this, when you shift to the people that are on the ground like the people in Southern California that have a long history of promoting natural gas and clean technologies, the South Coast Air Quality Management District they understand natural gas. They understand that it's the only weapon they have against Knox and the only thing that's viable today and so we work hand in glove with them. And so, yes we still are – that's one of the reasons I make these remarks today because I think people sometimes get lost in that somebody is going to bring to market an electric truck a few years from now that maybe 2.5 times or three times what we have today and it isn't any cleaner. So I think that is and you know the zero emission natural gas truck that we're talking about now the Cummins Westport product, that's only been now coming to market now, so it's new, but I think it's beginning to change a lot of the sessions at the conference in Long Beach talked about game changer. I think the renewable natural gas with this new engine is a game changer and I think the clean air regulators are having to take notice. And I know that the Port of Long Beach in LA are taking notice because they have the choice of waiting around for a decade for electric trucks or doing something about it today. And I don't think there is much choice when you put it in that context.

[Eric Stine:]

Yep, okay, thanks a lot.

[Andrew Littlefair:]

Yes.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from line of Pavel Molchanov with Raymond James. Please proceed with your question.

[Pavel Molchanov:]

Thanks for taking the question guys. So, here we are almost six months into the year and Congress has not even started seriously discussing tax reform. So I thought I would ask what the latest that you guys are hearing on getting tax expanders past without having to wait for whatever comes out of tax reform process?

[Andrew Littlefair:]

Yes, it's a good question and you know it's one that we are working on all the time and our folks in DC are working with the elected members on it. It's been one of these things Pavel that we've really discussed where in theory a broad tax reform package might have to do away with the extender package. Keep in mind that the VETC is part of this much bigger broad set of tax extenders, which is manufacturers and doctors, and homeschooling materials, it's a very big package of things. We have to be in there. I think the general thought is that if tax reform is not totally comprehensive and if it doesn't happen this year that it is likely that there's going to be a need to move ahead with the extender package again and that how this is all a lot of give and take going on. If the broad reform really is just kind of changing of some rates and maybe repatriation of money overseas and it doesn’t move to the next phase of kind of a broader tax reform, might, our feel is that the extender package could very well likely be extended here toward the end. So I know that's a lot of guessing, but that's kind of our sense that if you don't see wholesale grand reform, it is likely that the House and the Senate we will have to probably move forward at least for this year and maybe next year with an extender package.

[Pavel Molchanov:]

Okay and just a small question on your balance sheet, so you have the note receivable related of course to the BP sale of $123 million, when does that convert to cash?

[Andrew Littlefair:]

It converted to cash on April 3.

[Pavel Molchanov:]

Okay, so just, okay got it. So technically March 31 it was not all right, clear enough. Thank you guys.

[Andrew Littlefair:]

Okay, Thank you.

[Operator:]

Thank you. Our next question is from the line of Rob Brown with Lake Street Capital Markets. Please proceed with your question.

[Rob Brown:]

Yes, it's interesting.

[Andrew Littlefair:]

Hey Rob.

[Bob Vreeland:]

Hi, Rob.

[Rob Brown:]

The gallon volume growth was pretty good in the quarter, what's sort of your thinking on current rate of organic gallon volume growth in the current market?

[Andrew Littlefair:]

Our budget and I don't know if we disclose this, but we think that the growth seems to be given the current price environment of the competing fuels. It seems to be in this range, the high single digit range, the Redeem volume will go, I think will grow faster than that. I think the combination of the new zero engines later in the year, you could see it pop up a little bit above that, but I would say that this range is probably in the ballpark for what we see. I don't until you get to a little bit higher oil price, a little bit more differential, I think that would accelerate the growth rate. Otherwise I think this is probably about right.

[Rob Brown:]

Okay. Good thank you. I’ll turn it over.

[Operator:]

Thank you. There appear to be no further questions at this time. I’d like to turn the floor back over to Mr. Littlefair for closing comments.

[Andrew Littlefair:]

Good, well thank you all for joining us this afternoon. We look forward to updating you on our progress next quarter.

[Operator:]

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.