Clean Energy Fuels Corp. (NASDAQ:CLNE)
Q2 2012 Earnings Call
August 6, 2012 04:30 PM ET
Tony Kritzer - Director, IR
Andrew Littlefair - President & CEO
Rich Wheeler - CFO
Steve Dyer - Craig Hallum
Graham Mattison - Lazard Capital
Brian Gamble - Simmons & Company
Shawn Severson - JMP
Matthew Blair - Macquarie
Pavel Molchanov - Raymond James
Greetings and welcome to the Clean Energy Fuels Second Quarter 2012 Earnings Conference Call. (Operator Instructions). It is now my pleasure to introduce your host Mr. Tony Kritzer, Director of Investor Relations. Thank you. Mr. Kritzer. You may begin.
Thank you operator. Earlier this afternoon, Clean Energy released financial results for the second quarter ended June 30, 2012. 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 would 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, 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 today. These forward-looking statements speak only as of the date of this release and 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 measure should be considered in addition to result 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 10-Q today.
Participating on today’s call from the company is President and Chief Executive Officer, Andrew Littlefair and Chief Financial Officer, Rick Wheeler and with that I will turn the call over to Andrew.
Thanks Tony and good afternoon everyone and thank you for joining us. Today we reported revenue of $69.8 million for the second quarter compared to $69.1 million for the second quarter a year ago. Please note that the second quarter of 2011 included about $4.7 million VETAC revenues that is not in the 2012 amount.
In addition, revenues from our vehicle conversion business, BAF were little softer than we projected largely due to the expiration of the vehicle incentive credit. We delivered 48.6 million gallons up 24% from 39.2 million in the second quarter of 2011 which I am pleased with.
During the second quarter, we remained focused in executing the roll-out of our America’s Natural Gas Highway stations and growing our traditional core market segments which I will highlight in a moment. Those of you who have been following Clean Energy in the natural gas vehicle sector as a whole, know that one of our major focus is building the infrastructure that will enable natural gas become a viable transportation fuel for America’s long haul and regional truck market.
As we are solving the station infrastructure issue, we are also working closely with several engine manufacturers to deliver the desired engines for the heavy duty truck market which are really the 12 and 13 liter engines.
The 11.9 liter Cummins Westport engine is expected to become available in the first quarter of next year and the 13 liter Navistar and Volvo engines are expected to follow in late 2013 and early 2014.
Once these engines are widely available and initial phase of the highway is complete we believe the heavy duty Class 8 truck market will begin to make the switch. This adoption should be similar to what we have seen in the refuse market over the last five years, once that market had the right end. In 2008, when the 8.9 liter Cummins Westport engine first became available, the adoption rate of natural gas engines in the refuse market went from 3% that year to close to 50% of new purchases this year.
As an aside we see that adoption rate continuing to increase because of the enormous fuel savings refuse operators were experiencing compared to diesel.
To date we have completed construction of 22 of our highway stations and an additional 24 are under construction and 32 more are in various stages of entitlement, design and permitting. We are still targeting to complete construction of about 70 natural gas truck stop stations by year end and many of the station completions will occur at the very end of the year. The opening of these stations coincides nicely with the market availability of the 12 and 13 liter truck engines which I mentioned earlier. Most of the stations are located at truck stops with our partner Pilot Flying J.
As we anticipated, the competitive landscape of the natural gas vehicle fueling market has begun to evolve. We believe the emergence of others in this space is a positive validation of our efforts. It will help expedite truck adoption and alleviate initial concerns among fleet operators about fueling infrastructure.
The confidence in our market leading position is based on several factors. First, our strategic partnership with Pilot Flying J and our ability to leverage their existing station network is a tremendous advantage for us.
Pilot is the largest truck-stop operator in North America with approximately 550 locations, roughly two times as many as the second largest competitor. Our years of experience have allowed us to accumulate knowledge and expertise in regards to station operations, engineering, design and construction as well as the national sales team who have been able to cultivate strong relationships with customers all over the country.
The ability to secure LNG supply is going to be another differentiator for us and the years ahead. We own and operate two LNG production facilities, own a fleet of specialized cryogenic tanks, have supply contracts with seven LNG producers and source from six others across the country. We also have our own LNG design, fabrication and manufacturing company which is a huge advantage. Though remember I have mentioned this before, that NorthStar, our LNG fabrication Company built 10 stations last year and this year they are on pace to complete two a week.
Between our own production and a number of agreements that we have in place and in the pipeline we believe we have the LNG supply to meet the market demand in the coming years. For example we recently signed an agreement with the Metropolitan Utilities District of Omaha, Nebraska where we will have access to 70,000 LNG gallons per day. In addition, to providing LNG supply to our own filling stations Clean Energy is selling additional capacity to other customers as well.
We recently executed LNG supply agreements with Shell and PG&E. We just co-hosted a summit along with Pilot Flying J and we invited representatives from the largest for-hire carrier fleets in the country which represent over 200,000 trucks. The purpose of the summit was to continue to educate the trucking companies on our station roll-out with Pilot as well the deployment of natural gas engines and OEM offers. It was an important and positive meeting for both us and the fleet operators that should help continue the momentum of the conversion to natural gas. An example of this continued development can be seen just last week during the Cummins earnings call where their CEO stated that sales volumes of their natural gas truck engines had doubled since the second quarter last year and he didn’t expect that to slow down any time soon.
Turning now to sales and marketing, our National Trucking Team has continued their pursuit of lining up shippers and private fleets all over the country. At the end of June, we announced agreements to fuel five additional trucking fleets which haul some of the country’s largest and most well-known brands including Office Depot, [Ocean Spray] [ph], Publix, Sam’s Club, and (inaudible).
Saddle Creek Logistics Services based out of Lakeland, Florida has expanded its contract with Clean Energy to build additional private natural gas fueling stations to support their fleet of 60 freight liner CNG trucks in order to serve their Florida customer. We also began fueling new fleets with Premier Transportation in Atlanta, Lily transportation for their Los Angeles area operations, Lancaster Foods in the Mid-Atlantic and Land O' Lakes for their dairy operations in California Central valley. These fleets will all fuel at existing Clean Energy public access stations.
Many of these trucking companies are using their new cleaner running fleets as a marketing tool to attract new customers that have aggressive sustainability goals. On the capital side we recently received a second $50 million installment in Chesapeake that will be allocated to the build out of the highway. We of course appreciate their continued support.
Let’s move now to our core markets. We are seeing impressive year-over-year same store sales growth at existing stations in our taxi/airport shuttle market around the country as well as growth in our other core markets.
In Seattle, natural gas taxi volume is 200% higher than it was last year. And San Francisco and Oakland we see a 30% increase in fuel volume over the first half of the year compared to last year. In our Las Vegas market, fuel volumes had doubled year-over-year and we just confirmed orders of an additional 90 natural gas taxi cabs which is about 450,000 gallons annually late in the second quarter.
In Chicago, within one year of opening our first station there are now over 375 natural gas taxis in use with more being added monthly. These taxis represent over a million gallons annually. Additionally natural gas taxis were granted front-of-the-line privileges at O’Hare Airport which allows the cab operator to make more trips per day and make more money.
We also opened up new stations at Hartford, Tampa and New Orleans airports where the first vehicles were delivered. We have two more airport stations being completed right now and as we have previously mentioned these public access airport stations provide an excellent base as we move into new geographic areas. We now have 35 stations at airports across the country.
As many of you may have heard, the governors of 21 states came together to encourage Detroit’s Big 3 auto manufacturers to produce more CNG vehicles as many of them already do around the world. These states have issued a joint request for proposal, RFP, to the Big 3 as they have recognized the advantages of reducing their dependency on foreign oil and reduced emissions for the operation of their state owned vehicles.
This could prove to be a model of how a state can leverage the valuable resources and expertise available through companies like Clean Energy, to replace existing state owned gas and diesel vehicles to run on natural gas and other alternative fuels. This will also support the expansion of the private sector, business and stimulate job creation.
In our refuse sector we are contracted with 72 companies in a 158 locations and opened 12 new revenue stations in the second quarter. We have seen a 65% increase in our refuse volumes this year over last. A few highlights from our refuse business in the second quarter include in Chesapeake, Virginia we were awarded a station contract to construct and operate [and time] [ph] filling stations for Tidewater Fibers.
In Dallas, we just added more CNG refuse trucks to complement their already sizeable fleet of natural gas vehicles. Out here in California, neighboring Long Beach we secured an LNG supply contract with the City of Long Beach to deliver over 600,000 LNG gallons per year for their city refuse fleet.
On Long Island the extension of CNG refuse trucks continues as the town of Babylon just signed a 10 year contract to use 22 CNG refuse trucks. As you may recall, the first 25 CNG trucks were deployed almost six years ago in Smithtown and now there are over 250 trucks operating in the Long Island area. We think it's important to note that the majority of these CNG refuse trucks are owned by smaller local companies and cities.
The dramatic increase in the solid waste sector that we are seeing is coming from companies of all size, big and small.
In our Trenton market, we began fueling 36 new CNG gas buses for the City of LA Department of Transportation at our public network this spring which represents nearly 400,000 gallons annually and that fleet is expected to grow to about a 100 buses. We have also seen additional full sized buses been added to transit fleets this quarter. Santa Monica added 58, Santa Clarita added 12, and Las Vegas RTC has ordered 30 CNG buses for delivery next summer. These buses all replaced diesel units.
We also successfully renewed a number of large transit accounts. We extended our LNG supply contract with the City of Phoenix, Arizona for one year, and this provides fuel for over 300 LNG buses. We signed a new three year LNG supply deal with Tempe, Arizona to provide fuel their 89 LNG buses.
We also negotiated a four year extension for the (inaudible) for operation and maintenance under LCNG station and they have plans to replace 40 gasoline shuttle buses with CNG shuttle buses in order to balance the budget. We renewed a 5 year $1.5 million contract with Omnitrans for the operation and maintenance of two LCNG stations and we won their LNG supply earlier this year so we are already providing their fuel. They operate over a 160 transit buses throughout San Bernardino County, California.
Now let me turn to the construction cart. At our refuse, airport and transit markets we have completed 26 new projects to-date with 17 projects in construction and 15 projects in design and permitting. Between our highway stations and our core market projects we have completed construction of about 48 stations so far this year which compares to 21 stations we have completed at this time last year. This represents a 125% growth over last year.
Currently we have 677 deals in our project pipeline in various stages of validation, qualification and negotiation. We are very happy with our year-over-year pipeline numbers. Closed deals increased 91% from 70 to a 134 deals in negotiation and validation, and deals in negotiation and validation nearly doubled and deals in the qualified [projects] [ph] increased 25%. These deals do not include America’s Natural Gas Highway projects.
Our biomethane operations continue to make progress during the second quarter. Our McCommas Bluff landfill project set a new record for production in June producing close to 1.2 million gasoline gallons for the month and we are slated to complete the expansion of the McCommas processing plant by the end of September.
Our biomethane plant in Michigan is almost finished and we anticipate that we will commence production of biomethane this month. As you know we have been hard at work on this project since late 2010. It is the first biomethane project facility -production facility we have built from the ground up. We are very excited to bring this facility online and expand our ability to offer our fleet filling customer’s fully sustainable biomethane vehicle fuel.
In June, we reached an agreement to develop a new biomethane production facility at our landfill outside of Memphis, Tennessee. Our team is hard at work on this project and we anticipate that we will be able to bring our third bio-methane production plant online in late 2013. The facility is anticipated to produce about 4.5 million GGEs in its first full year of production.
And with that I will turn the call over to Rick.
Thanks Andrew. Before I review our financial results I would like to point out that all my references for our results will be comparing to second quarter of 2012 with the second quarter of 2011 and the first six months of 2012 to first six months of 2011 unless otherwise noted.
Volumes rose to 48.6 million gallons during the quarter up from 39.2 million gallons a year ago. The first six months of 2012, volumes increased to 92.3 million gallons up from 74.7 million gallons.
For the quarter, revenues increased to 69.8 million up from 69.1 million. For the first six months of 2012 revenues increased to 143.5 million up from a 134.5 million a year ago. One thing to keep in mind when comparing our numbers between periods, the first two quarters of 2012 did not include any volumetric excise tax credit or VETAC revenue as we VETAC expired on December 31, 2011. VETAC revenue was 4.7 million and 8.9 million respectively in the second quarter and first six months of 2011. Also during the second quarter of 2012 we recorded approximately 2.1 million related to Low Carbon Fuel Standard credits when the credit program was reinstated due to the lifting of a federal court injunction that had previously prohibited enforcement of the California Low Carbon Fuel Standards. The $2.1 million represent the value of the credits we have generated since the program began in January, 2011.
On a non-GAAP basis for the second quarter we reported a loss of $0.16 per share. This compares with a non-GAAP loss of $0.10 per share in the second quarter of 2011.
For the first six months of 2012 our non-GAAP loss per share was $0.33 per share and it was $0.15 per share in the prior period. Adjusted EBITDA in the second quarter of 2012 was minus 1.6 million which compares to adjusted EBITDA of 0.9 million in 2011. For the first six months of 2012 adjusted EBITDA was minus 3.6 million compared to 4.8 million last year.
Again please remember the second quarter and the first six months of 2011 includes a 4.7 million and 8.9 million respectively of VETAC revenue.
Adjusted EBITDA and non-GAAP EPS are financial measures we develop to highlight our operating results excluding certain large, non-cash or non-recurring charges which are not core to our business including the amounts we are incurring for the Series I warrants valuation, our stock based compensation charges and the foreign currency gains and losses related to our IMW purchase notes.
Adjusted EBITDA and non-GAAP EPS are described in more detail in the press release we issued earlier today.
Our net loss on a GAAP basis for the second quarter was 11.3 million or $0.13 per share which included a non-cash gain of 8.9 million related to valuing our Series I warrants, non-cash stock based compensation charges of 5.8 million and $0.5 million foreign currency loss related to the notes we issued to purchase IMW. This compares with the net loss of 5.6 million or $0.08 per share in 2011 which included a non-cash gain of 4.8 million related to valuing our Series I warrants, non-cash stock based compensation charges of 3.6 million and forward currency gains of 100,000 on our IMW purchase notes.
For the first six months of 2012, our net loss on a GAAP basis was 43.2 million or $0.50 per share and included the non-cash charge of 4.6 million related to the valuing the Series I warrants, non-cash stock based compensation charges of 10.4 million and 100,000 foreign currency loss related to the notes we issued to purchase IMW.
For the first six months of 2011, our net loss on a GAAP basis was 15.4 million or $0.22 per share and included a non-cash gain of 1.5 million related to valuing the warrant, non-cash stock based compensation charges of 6.9 million and a foreign currency loss of 0.5 million on our IMW notes.
Our SG&A charges are higher between periods primarily as a result of hiring people as we ramp up to support our construction of America’s Natural Gas Highway and our anticipated growth once it comes online, and our interest expenses is also up between period due to the interest charges we are incurring on our $200 million of convertible notes we issued in the last half of last year.
During the second quarter and first six months of 2012 we recorded a reduction of 1.6 million and 4.3 million respectively related to the amount we estimate we will ultimate pay [to next][ph] with the contingent consideration on the IMW acquisition. Our gross margin this quarter was 21.3 million which compares to 18.7 million in 2011. For the first six months of 2012 our gross margin was 39.1 million compared to 37.
Excluding the Low Carbon Fuel Standards credit recognition and settlement with one of our LNG customers related to supplier cost overruns related to servicing the contract, our margin per gallon on our fuel sales this quarter was up a penny from last quarter $0.29 per gallon and with that operator please open the call to questions.
(Operator Instructions). Our first question is from Rob Brown of [Lake Street] [ph]. Please go ahead.
Rob Brown – Lake Street
Just wondering if you can give us a little color on how the gallon ramp is expected from the Natural Gas Highway stations, I know you have several open now and would suspect not a lot of gallon volume is in the number yet but how do you see that ramping through the rest of the year and into the next year?
Well, let me just kind of cover that generally, first off remember a lot of those stations won't be complete till the very end of the year. I think Rob, you and I discussed before, and I have shared with many of you on the line that our job, job number one for us, our National Trucking Team is to make sure that as we get the stations open we do our dead level best to get 20, 25, 30, 35 trucks loaded on those stations. And of course that doesn’t always happen perfectly and we have some stations that have just been finished here in the last few weeks that don’t have trucks there yet, but they are coming, and so this is something we try to correlate as best we can and in fact we can actually delay the opening of a particular station a little bit as we see it.
Our trucking customers are - many of them are really waiting for this 11.9, and we call that the 12, it's the Cummins Westport engine, that’s the size the 12 and 13 liter engines really [important] [ph] size for the trucking market and so on one way Rob it's good that a lot of our stations are coming online at the end of the year because that will be closer to one, the arrival of the commercial launch of those engines in the first quarter, late first quarter of the 12 and 13 liters.
Now when do we see that happening? If we get specific about (inaudible) is as these stations open in the latter part of this year, we are doing our best right now to get trucks introduced into these fleets and we are making very good headway, Jim Harger and his team, of the 9 liter Cummins Westport and the 15 liter HPDI from Westport and we are having some success working closely with Westport alone but you are going to see them - keep in mind that truck, we kind of use Rob 20,000 gallons a year for truck, right, annual use. So we anticipate by the time you these stations get open and it's not always perfect but after a month or two that they should have 20-30 trucks on each stations.
So they started out with an annual load of 600,000 gallons a year, 400,000 to 600,000, then our job is to load them up to their capacity which I would imagine it will take most of 2013 and into 2014 where they can get up to do the 2 million gallons, the 2.5 million gallons a year, and that’s our plan. But you don’t need thousands of trucks per station in order to make that happen, you really need a 100 using 20,000 gallons, right, that get you to 2 million.
So you will see it, you’ll see them start for the latter part of this year with 20 trucks which is an annual run-rate of 400,000 gallons (inaudible).
Rob Brown – Lake Street
Maybe if you can give us some color on your project pipeline, is that refuse driven, is it all of your customers, maybe just some color on that 600…?
It's really kind of exciting; if you remember from last time I think we were at 540 and I get a lot of questions in this pipeline even internally by guys like - sometimes we don’t explain it well. When we add up those deals it really comes from three different - it comes from three different areas, and it's us validating whether or not a customer, it makes sense for a customer, right, so that’s the [whole class of] [ph] and then it's - we qualify that customer and then we negotiate a deal with the customer.
So we’ve gone from having, last time we talked, 540 deals in those three classes to about 675 or so now so that’s a nice move up. Then we have deals, all right, closed deals, so that’s gone from about 70 it's almost doubled, I think here we’ll say 91% or 92%, which is a nice move from quarter-to-quarter that, but keep in mind - that is not just stations for us, that could be a fleet fueling agreement, that can be fueling a new fleet, it can be building a new station and so it is two or three different kinds of deals, fueling deals, station deals that we have with our customer. So that’s how we measure that.
I keep an eye on this the pipeline because we have a lot of salesman out there right now working and so we’ve got see substantial increased movement in that pipeline and I am glad we are.
Thank you. The next question is from Steve Dyer of Craig Hallum.
Steve Dyer - Craig Hallum
You touched a little bit on same store sales, but I am not sure that I necessarily heard a number. Is there any way you can give us a little color on the utilization sort of within existing stations and the organic growth in those stations?
I don’t know that I have a top line number to give you right now. Let’s put it this way, all of our stations have - most, almost all of our stations have capacity remaining and certainly all of the highway stations because some of those are just coming on, even a few of our new highway stations were pretty proud of the fact like in Las Vegas where we already have 60 or 70 trucks putting 1.5 million gallon ramp here right out of the chute after the first three or four months, that’s only 50% capacity or a little greater than that.
Our CNG stations at our airports all have capacity. Our LAX station I would say runs at about 75% to 80% capacity but it's been in service like a while. All of our new stations have capacity and I would really just be guessing Steve but I would say that many of them are – would find themselves to be more 25% to 30% so there is a great deal of growth that can happen at our stations just by increasing same store sales.
Steve Dyer - Craig Hallum
That’s helpful. Thanks. And then in your station pipeline as you look at, could you give us a little color maybe the mix between the supply agreements and then the O&M agreements in the pipeline?
Steve, I am sorry, ask me that again, okay, I have got..
Steve Dyer - Craig Hallum
Just the mix between the fuel - supplying the fuel and the O&M agreements in the pipeline, in your station pipeline right now.
Okay. Well, a lot of our refuse, and we do a lot - (inaudible) Waste Management and Republic, those stations those have O&M agreements, and I would guess right now we finished 12 in the last quarter but thinking in the horizon we see 36, 40 refuse deals, those are all O&M agreements. But this year you are going to complete, don’t hold me to the exact number, but you are going to be in the ballpark between the 120 and 130 stations and that will break down, 40% of those, what do you say Rick, 40 or some odd percent of those will be O&M and 6 because of the highway…
The whole of the highway will be in the fueling supply business obviously transit and refuse typically are highly slated for the (inaudible), taxi shuttle, van stuff, airport stuff, retail world. I don’t know if we have an exact breakdown but I am going to semi-pause a little bit here but obviously with the trucking market being such a big chunk of our business going forward, we anticipate a lot of our future volumes is going to be in the retail fuel supply world where we want it to be.
Steve Dyer - Craig Hallum
Great. And then last question for me, BAF, if you could talk a little bit about the pipeline there, I know it's been very tied to AT&T and Verizon in the past, how do you sort of see those volumes playing out throughout the balance of the year and maybe how many different fleet customers versus in the past?
We are softer at BAF right now because we haven’t had candidly some big fleet orders from AT&T and Verizon. So that would, if you have any input over there, that would help. But on the positive side with them, they have expanded their customer base. We are dealing with a lot more fleets and cities and E&P companies, so I think our management team has done a relatively good job. We are down, we are little bit softer than we’d like in the quarter. We are still hopeful that because of the full forward line up we have that we’ll catch up but nothing like having a couple really big fleet customers, that would help.
Thank you. Next question is from Graham Mattison of Lazard Capital.
Graham Mattison - Lazard Capital
Just to follow-up on Steve’s question on the split between O&M and retail, can you give us a sense of the volumes that you added over the last year. Of those incremental volumes, what was the split between O&M contracts versus retail?
I would say over the last year it's been heavily slanted toward the O&M world simply because the LA MTA deal that we brought on over the last year have been much larger contracts and they fall into the O&M bucket. That coupled with, what Andrew alluded to, the Republic and Waste Management guys in the refuse world are kind of in that model, which obviously has been a pretty good chunk of our growth over the last year as well.
Those two things together probably add up the majority, or maybe even vast majority of the business into that pocket, and the other stuff will be in the retail world, obviously, primarily, the airport/taxi shuttle stuff as well as some of the small refuse haulers and some others as well as the trucking company stuff we have done, Saddle Creek et cetera could be in the retail fuel bucket.
But Graham, going forward, as much as because of the weighting of the transit, we were O&M, we really see the commercial retail in this regional trucking market eventually working the O&M piece of business. So O&M accounted for a lot of it, we hold going forward we believe we’ll begin to change.
And one thing that gives us comfort in that is if you look at our last couple of quarters, our margins were down, it’s been ticking up a little bit, which is indicative of hopefully we are bringing in more of our business into the retail world to start to pull up the margin per gallon number which is basically offsetting, making the O&M people smaller as part of our overall business picture.
Graham Mattison - Lazard Capital
Okay. And then a question about available LNG equipment for the stations, recently on the Charts Industries call, they talked about very strong demand for the fueling equipment from multiple companies out there, are you seeing any delays or tightness in the channel and has there been any change over the past year in terms of the pricing you are paying for equipment from them or others.
Because of what we have done with America’s Natural Gas Highway, we created a little bit of that tightness because we put in some very big orders with them, I imagine I mentioned that. We actually have seen equipment loosen up some. There has been more capacity brought to the market through our friends at Chart and others. So while we were tight six months ago that’s I think loosened up. And I think we feel good about the pricing that we’ve seen currently versus where we were six to eight months ago.
We are also trying to do some things on the purchasing side, now that we are starting to buy bigger lots and be a bigger customer, watch our supply chain a little closer, so we believe some of those things should help as we go forward.
Graham Mattison - Lazard Capital
Great and then just last question for Rick, the 27 million in SG&A in the quarter I know you mentioned part of this but I think I missed it. Were there any one-time items in that and then how do you see that playing out over the course of the year and into next year?
Just the IMW contingent consideration gain, if you will, that was in there, that’s a one timer. The other stuff, the biggest chunk has just been our salaries increase as we just brought on more people and we went from 829 people in the second quarter last year to 1110 in second quarter this year. That coupled with the associated bonus commission, stock based comp expenses, et cetera is the biggest chunk of the increase. As far as where it goes I would see it probably kicking up a little bit, maybe rest of the year, just from the perspective of our continuing to add people and grow. I guess just on the SG&A thing we are talking with an investor guy this morning and we get to hear about that a lot that as we go around and talk about people. We just want people to understand we are not, don’t think out there are spending willy-nilly or overly aggressively. We think we are making good, solid investments in the future that are going to pay-off. A good example of that is we have got 30 to 40 salesmen out there working on the trucking business trying to get deals locked up, once these engines show up, we will get our stations up and running. Well, their salaries are in our P&L right now and they are really not generating any revenue. We hope obviously that’s going to change in the coming years and all of a sudden they will be covered up with the revenue that they generate with the fuel sales.
So, there is just a lot of stuff like that in there that I guess we think kind of makes the number look a little worse than it really is. I see that continuing, kind of we see big groundswell coming and we want to make sure we are out on one of it and positioned to capitalize to it and build the infrastructure and the people, and the resources to capitalize on it. It will probably take a long time kind of where it's been at, maybe up a little bit.
Graham Mattison - Lazard Capital
So think of it as an absolute number as opposed to percentage of revenues?
I kind of would for now just because our revenue number kind of moved up and down just depending upon some of the lumpy piece of the business i.e. compressor sales, vehicle sales, station sales might be a better way to look at it.
Thank you. The next question is from Brian Gamble of Simmons & Company. Please go ahead.
Brian Gamble - Simmons & Company
Wanted to talk about natural gas specifically, I know you know and everyone on the call knows, all four, yes, agreed, we all know that the price move from 225 to 325 doesn’t mean anything. Are you still having to educate any of your customers and your potential new customers when gas makes those sorts of moves as to the economics of the continued viability at three in a quarter and even well obviously north of that.
A little bit, but less today than we have. Occasionally you will hear people say, well, natural gas is so volatile and then we have to remind them if you divide by eight, it's not very volatile, and you know that Brian. So occasionally we work with a group, the trucking group, and we had the days I mentioned at the summit, it came up. But I would say that a lot of our customers now understand that. I will tell you what, they are more convinced that oil is going to go up and diesel is going to be expensive, and they are worried about natural gas right now. It doesn’t, because the volatility and the prices of natural gas doesn’t appear to be as sensitive as it once was, I don’t think.
Brian Gamble - Simmons & Company
Fair enough. And then you mentioned you would love to have some fleet orders, while I can’t help you there what do you think can help you get some additional orders like that?
I mean we have done pretty well, we are just lacking in it, and I wish, I am sorry, I don’t have it right in front of me but I know that we have really - we have got dozens more fleet customers this year than we did last year. We are just a little lacking, I mean in order to really knock it out of the park, we haven’t had the big 500-1000 vehicle type orders that we have enjoyed before. We are working on one and so are my competitors I am sure. We believe there is other big orders out there from some significant leads and we hope to get our fair share.
That would end up making the year, so, I think they have done a nice job. We have trained now, I think we’ve about 50 or 64 dealers. We are seeing orders from all over the country, guys are flooring taxi cabs out here in California and in New York City that we convert, travel buses are going to really all over the country. We are shy that couple of big customer fleets that would really making it a banner year. And I am hoping we will get those and you know you just have to work on it, we will probably get one.
Brian Gamble - Simmons & Company
And when you mentioned those state RFPs for vehicles from the big three, have there been any indications that they are going to respond to those or is that just the states trying to get in front of things.
I think it's a pretty interesting turn of events that you get all of these governors, republican and democrat come together in a non-partisan way to push this. I think it's been impactful up there in Detroit and now they are talking about real orders. So I don’t know that we have really seen any orders in yet, this is just fairly current. But what’s also interesting is, you’re seeing some other states beginning to put into motion purchasing plans for their own fleets where it will just be natural gas vehicles, so stay tuned there on that, but that’s going to be the fallout of this, that’s kind of the companion piece to this RFP with the big three, state saying, hey, guys we want these vehicles, then they are going to in turn internally under state bids begin to require their agencies to buy natural gas vehicles and that’s next. And we are busy working with one of these states on that very thing.
Brian Gamble - Simmons & Company
Great and last thing for me, you mentioned backend loading of the stations and that makes sense, 22 complete year-to-date, goal is 70, we are talking another 10 this quarter and 40 being backend loaded in Q4, I mean is that about the right mix to think about?
It's a little bit less than that. You know I will say I thought we would have a few more done right now, I think I told you last time that we would be closer to 30 right now and we are at 22. We have a whole bunch that are getting ready to finish and we are giving you real numbers here, so we run into some -- we had a bad week a few weeks ago where two separate fire marshals wanted fire hydrants which is kind of unheard of, and so that delayed us a couple of weeks in the eastern location. So things like that come up. I think in the last quarter though it’s closure to 20-some-odd. We are trying to bring those forward into the year so that we can get them all done. But you know -- so you’ll have a bunch of done in November, December, and some will inevitably spill into January. I will tell you the bigger story though is the next 100, you are going to build next year, and we are working on that now.
So we are not done at 70. We see and have customers that want stations at specific locations, either at a distribution centers or at plants and that will be the next phase of this next year that we are working on now. So we need to -- when we talk to you later this year, you are going to want to hear that we have 50 or 60 or 70 other locations that are in the ballpark [ph] for next year, in order to get another 100 stations.
Thank you. The next question is from Shawn Severson of JMP. Please go ahead.
Shawn Severson - JMP
I was just wondering if you could talk a little bit about kind of the fixed cost we should expect as these stations roll out? I mean obviously I know there can be a lot of variable costs but when we are looking at margins and cost and heavy and rapid ramp, how should we think about fixed costs?
Actually the good news, the bulk of the fixed cost are included in our margin number per gallon, just from the perspective. we really put a direct ROE. We basically use the direct costing method, i.e. write all of the property taxes, the guys – the rents, the guys to maintain the station, the property to run the station, all that stuff is up in our margin line. But the good news is, once you get past the margin line, there is really not a lot left from a fixed cost perspective. I mean obviously it is your basic G&A stuff which should be pretty miniscule on a per gallon basis once these stations get up and ramp.
So, we don’t really kind of get into fixed variable kind of costing, we look at a more from a margin per gallon and an EBITDA basis. That gives us some flavor on kind of I guess the part that you want to kind of slice and dice it that way.
Shawn Severson - JMP
And then secondly just trying to figure out what the environment is for renewing contracts, especially for your typical fleet vehicles. I mean are you seeing more companies come in to try to work through your customer base, are you still kind of working without a lot of pressure I guess from competition.
You know there is more pressure than there was before. I know that our Chairman as he works across -- occasionally, we try to have something to say about policy related to the utilities getting in the business or wanting to use the repair [ph] money and so we keep track. Our argument is that the private sector is now, there is a definitely a lot of people in this business, you don’t need to have regulated utilities to be in the business. I think we keep track and I think we are up to 45 small companies like ours. We are bigger and some have CNG, some are LNG, some are construction oriented, but there are a lot of players in the business, many of them have only done one station or in one state but we do see competition.
We do have customers coming in and try to win against us and I think that’s good, I think that keeps us sharper, we’ve seen it the refuse business all the time. We certainly see it at RFPs and your municipalities. When we build a station for a customer and use our own capital, we offer them very long term contract. So in those, it's pretty tough for a competitor to come in and displace us. I mentioned this before the other day, I don’t think on our last call, but it's interesting because we talk, we here about competition all the time. We are at 35 airports, soon be at 37 airports, several of them, we have several stations. We don’t have any competition.
So I don’t know if the business is all that hard, no one wants to compete, or it's too hard or what, but I mean there’s lot of people who are concerned about competition just moving around the corner and knocking us off. Well, we have been in this airport segment for 10 years and we don’t have much competition. I think we have one station or one or two competitors out of those 40 some odd stations that we have at 35 airports.
But yes, we are seeing more competition all the time.
Shawn Severson - JMP
Do you happen to have a rough estimate of how much of your business is kind of locked up in longer term contracts versus those that might turn over every couple of months or every six months or something like that just trying to understand the scope.
Well let me kind of come at it this way and then Rick is listening, if I botch it, he can help. So you know we have about 600 or 700 fleet customers. Now these would be Waste Management and Republic and UPS and FedEx, household names, and we are proud of that. And many of them we have done business with for years, SuperShuttle, I mean for 10 years, 15 years, and we have a pretty good track record of retaining that business. And many of those contracts are five year deals and some of them are 10 year deals and some are 10 year deals with two five extensions. So there is, we have about 600 or 700 contracts that will fit in that category. Of course, you know I just went through and talked about our airport stations. Rick and I call that our commercial retail business, right, so there we are pricing up against gasoline and diesel.
But you know we are serving taxi cabs and we don’t have any contracts with all those taxi cabs, we have some larger taxi cab companies, we have a lot of taxi cabs that come on and they are just cash and carry on a daily basis. And at a lot of those airport stations though, we have long term contracts in order to get that land from the airport authority and we have 5 and 10 and 15 year deals with the airport.
Now with our refuse customers, we have, where we use our capital, we typically have 10 and 15 year deals. And then on our big transit properties, I would say typically, wouldn’t you, Rick, that most -- they can’t -- many of those transit agencies can’t contract much over five years. And so most of those are five years and then they roll-off, it's kind of a current deal where you may have a year to go on one of them and they re-up for two or three, sometimes five years. So I don’t have a number before you but as we talk about our -- transit makes up 50% or 60% of our volume today. Most of that are contract and I would say the average length of those contracts are probably three years and running now.
Yes, that’s exactly right. You called the transit piece out; all those contracts are basically three to five years. You go through the RFP process and that’s just kind of how those work. Pieces of business that’s left on our other core markets in the trucking world, I will just say the majority of our customers are probably on a contract basis, as well as coupled with comments as we go forward, there’s probably going to be less and less, so as we build out these highway stations and just do deals with the truckers similar to we do with taxi cabs now whereby we are just basically selling fuel, they pull into our station.
But you know we will offer volume discounts for contracted volumes and so you know you kind of will be able to reach. .
Thank you. The next question is from Matthew Blair of Macquarie. Please go ahead.
Matthew Blair - Macquarie
Could you help us understand the lag time between when construction is done on a station and when that station actually opens and is supply and volume? And maybe a good example here, just with your 22 America’s Natural Gas Highway Stations that you have completed, how many of those are up and running today.
It's a good question and you know if I can just take one step back on the core market business, okay, so for those we’ll finish something closer to 60 of those station this year in transit airport refuse. Those stations open and they have vehicles on them when they want for sure because typically we contract with that customer to put that station there. And occasionally there is a week lag time, while they are putting decals on a taxi cab or a new meter or something but it's pretty seamless.
Now the America’s Natural Gas Highway, we are trying to make it as seamless as possible, we have 22 stations completed, I think we have about 8 or 10 of those that probably have been finished here in the last three weeks or so, are not open yet, are awaiting the arrival of trucks. And there is no reason for us to have LNG sitting in a tank vaporizing and go into the atmosphere until we have those trucks there. So half of them are open and fueling and half of them are waiting for the first 20 some-odd trucks, that’s kind of the way it's working right now. And of course we are doing whatever we can to make sure it's as tight as possible on that. So we are really – we’re a little bit ahead of ourselves here for the next bit, because we don’t have all the engine, the delivery, the 1.9 that we want, but they will be here. So when we get the majority of those stations late in the year, I would say that you have trucks fueling at those in first 30 days, typically.
In some cases, the trucks are already there, they’re waiting for us. So, it just kind of depends.
Matthew Blair - Macquarie
And then in terms of funding for future growth in 2013 and 2014, could you talk about options on the table here in terms of equity or debt or possibly asset sales, what are you looking at here?
It's a good question. As you know, if you start totaling up the stations I am talking about, you will see that in late ’13, ’14, we believe because the way the business is growing, you are going to need more capital. We are trying to be very mindful of the fact we don’t want to dilute all of our shareholders. So we are trying to look at other ways to have the capital that we need, so we are trying to do it differently, and we are looking at different debt ideas. We are actually looking at couple of MLP ideas with some of our existing assets and so we are trying to explore all our options.
We have a bunch of assets, station assets that don’t have any debt on them today, so we are looking and weighing all of those different things now. I think we are in pretty good shape through the first half of 2013 and even a little bit later than that and then we will need to figure out how we create a little capital. Rick, you may want to…
No, I think that’s exactly right, I mean we have about 235 million of cash and short term investments at June 30, I think we disclosed in the Q, we anticipate to spend a 128 million over the rest of the year, so you kind of do that math. That puts us in a good stead heading into 2013. And then I guess, I would agree with Andrew, I mean we want to make sure we have enough money to capture opportunity, we are just going to go as equity light as possible as we can, as we go out and search for, figure out how to fund kind of that next round of stations that we are going to need to build and fill and make sure the network is adequate, we got stations in the right places for our customers and all those types of things.
Thank you. Our next question is from Pavel Molchanov of Raymond James. Please go ahead.
Pavel Molchanov - Raymond James
Kind of a big picture one, if I may, obviously the NatGas Act didn’t work out back in the spring. Is there anything that you are looking at in Washington either before or after the election in the lame duck session that would be relevant for the industry or you guys specifically?
Well, you know the other day and we don’t talk -- we are very pleased that the economics are strong as they are, right, so that -- the industry, it’s -- the good news is we can sit on our bottom I think with strong economics. However, there are still those in Congress and still those who want to provide incentives to move this ball faster. Just last week, right, you follow that, the Senate Finance Committee went ahead and passed 19 to 5 the ETEC extension in that extenders bill which is the $0.50 a gallon tax credit for fuel.
Now that’s not done yet, right, that’s got to get passed by the floor, by the Senate, and then it's got to go over to the House. We are told that wouldn’t happen probably after the election. I do think they will take up tax extenders bill in the House after the election. So that’s one piece that’s out there. That obviously helps companies like ours, it helps bring -- it helps make fueling stations a little bit more economic because it tends to help on the economics of light stations that maybe aren’t as heavily loaded as they should be in the beginning of this new industry. So that’s one piece. There are those still talking about incentive type legislation albeit probably different than the original NatGas Act in the House.
There were some hearings the last month or so talking about different barriers to entry for natural gas and what should be done to expedite the business. So, I guess I feel like we don’t have to have that legislation and we don’t spend a huge amount of time on it.
I think you will continue to see some efforts in the Congress to push this along. Meanwhile, in the states, you have this effort ahead of the states, who are talking about tax holidays in difference states, they are talking about different tax incentives on sales tax in the states. You have these 21 governors that are doing what they are doing, you have 14 other states that are talking about doing -- you have a lot of different local initiatives as I mentioned in my remarks. Chicago O’Hare, when they get somebody upon the line, there is probably nothing that’s more effective than driving natural gas taxis. So, there is a lot happening. I am not sure our friends in the federal government are always going to get there first.
Pavel Molchanov - Raymond James
Kind of follow-up on actually your kind of internal workings, if I can ask about this. You have historically stayed away from providing guidance, particularly on top-line. And I am curious if you are, obviously given the disconnect between where the numbers came in and where the Street was this quarter, if you may be rethinking that going forward.
No. In fact, we are sitting here, talking to our analysts. Frankly, we are not sure how you guys are getting these numbers. I mean our whole theory on revenue is basically you know where we started last quarter. We have given you a flavor on what’s coming i.e. vehicle sales are up, IMW sales are up, transfer sales are up, based on us going through and talking about the highway project, the timing, you should get a good feel along kind of where that number is going to be and we are somewhat perplexed on why people continue to miss that number, the upside by such a large amount. From our perspective it's not that hard to get your hands around, we are scratching our head a little.
We hear you and obviously we are doing an okay job on I guess on the margins per gallon and the earnings numbers we missed, apparently we are not doing a very good job making sure you understand all the various pieces of the business. We are going to have to do better than that going forward. So I hear the question and we are going to be talking with lot of our folks to make sure they understand what we’ve got to have.
Thank you. We have no further questions in queue at this time. I would like to turn the floor back over to management for closing remarks.
Well, thank you, operator.
I am pleased with our progress that we are making and growing core markets and building out our station network. We have more than doubled our station completions are on track to reach close to 400 stations by the year end, and that ultimately is going to be what you are going to have to see in order to drive the volume that we think will come. However, I would like to reemphasize what I said at the end of the last quarter, 2012 is about execution or station build-out and making sure we continue to collaborate with the engine manufacturers and fleet customers. As the availability of new engine offerings becomes more wide spread, our station network continues to develop, we believe we are poised for a significant volume growth in 2013 and beyond.
So thank you for your continued support. I look forward to reporting to you on our progress next quarter.
Thank you. Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.
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