Clean Energy Fuels' (CLNE) CEO Andrew Littlefair on Q2 2016 Results - Earnings Call Transcript

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Clean Energy Fuels Corp. (NASDAQ:CLNE) Q2 2016 Results Earnings Conference Call August 9, 2016 4:30 PM ET

Executive

Tony Kritzer - Director, IR

Andrew Littlefair - President and CEO

Bob Vreeland - CFO

Analyst

Eric Stine - Craig-Hallum

Rob Brown - Lake Street Capital Markets

Pavel Molchanov - Raymond James

Operator

Greetings and welcome to the Clean Energy Fuels Second Quarter 2016 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. Please go ahead.

Tony Kritzer

Thank you, operator. Earlier this afternoon, Clean Energy released financial results for the second quarter ending June 30, 2016. If you do not receive the release, it is available on the Investor Relations section of the company's website at www.cleanenergyfuels.com where the call is also being webcast. There will be a replay available on the website for 30 days.

Before we begin, we’d like to remind you that some of the information contained in the news release and on this conference call contains forward-looking statements that involve risks, uncertainties and assumptions that are difficult to predict. Words of expression reflecting optimism, satisfaction with current prospects, as well as words such as believe, intend, expect, plan, should, anticipate and similar variations identify forward-looking statements, but their absence does not mean that the statement is not forward-looking. Such forward-looking statements are not a guarantee of performance and the company's actual results could differ materially from those contained in such statements.

Several factors that could cause or contribute to such differences are described in detail in the Risk Factors section of the Clean Energy’s Form 10-Q filed August 9, 2016. 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 operating business 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. As I have over the last two quarters, I’m going to keep my remarks focused on the most important takeaways from what we was another very positive quarter. We reported second quarter revenue of $108 million, which is a 24% increase over the second quarter of last year.

Additionally, we reported 26.7 million of adjusted EBITDA, which is a $29 million improvement over the second quarter of 2015. This is the fourth straight quarter where we reported positive adjusted EBITDA. The second quarter of 2016 included 6.5 million of VETC and a gain of 10.1 million from our converted buybacks. However, even when these very real benefits are backed out, our adjusted EBITDA was still positive $10.1 million, which a $12.7 million improvement over the second quarter of 2015.

We delivered 82.9 million gallons to our customers; this is an 11% increase over the 74 million we delivered during the second quarter of 2015. On the last few earnings call, I told you that our primary focus for 2016 would be deleverage the balance sheet, conserve cash and grow volumes.

To that end, I’m pleased to report that we recently retired the remaining $85 million of convertible notes that were outstanding and due at the end of this month. No amounts remain due, and all of the 2016 notes have been paid in full. So far this year we have paid down or repurchased 214 million of convertible debt, taken our convertible debt from 545 million down to 331 million, a 39% reduction.

At the end of the second quarter, we had approximately $182 million in cash and short term investments on our balance sheet. The capital we raised with those convertible notes was used primarily to build out the initial phase of America’s natural gas highway. Our growing volume and improved financial results are a testament to our ability to leverage our extensive station network with new customers and expanding with our existing customers.

Additionally, we have reduced our SG&A by 13% year-over-year, while growing our volume 11% and revenues 24%. We’ve also increased our margin per gallon 20% over the second quarter of last year. Our CapEx budget for 2016 is on track to be around 25 million, which is 15% less than last year. So we are executing our plan to reduce our debt and conserve cash.

Keep in mind that all these improved operational results came in the face of continuing challenging low oil and diesel prices. I’m proud of the hard work and focus our employees have demonstrated to successfully navigate a really tough environment.

The success we had this quarter was a result of many of our long time customers continuing to make investments in their own natural gas fleets and operations. Our enduring partnerships with companies like Waste Management, Republic Services and LA Metro to name a few have built a strong recurring revenue model that is the foundation of our continued growth.

In face LA Metro recently released a study in which they concluded that natural gas was the most cost effective and cleanest solution for their fleet of almost 2300 buses. The study even considered electric buses, but concluded that natural gas was the superior solution. We believe other transit fleet, as well as many other heavy fuel used fleets are reaching the same conclusion.

A couple of good examples include the California cities of Santa Clarita which recently extended a 1.3 million gallon a year agreement with us for four years and (inaudible) City which last month awarded us a contract to expand their CNG fueling capability. These two transit authorities continue to show their commitment to the cleaner fuel and altogether will be added about 170 CNG buses to their fleets.

There are several developing initiatives both on the federal and state level that are very bullish for the advancement of natural gas vehicle as a cleaner alternative. One example is from the recent Volkswagen settlement, where $2.7 billion from the settlement is being allocated towards heavy duty, lower NOx trucks. California alone is set to receive $381 million of that settlement and we are confident that a large portion of those funds will be allocated towards low NOx natural gas trucks and we expect to benefit.

We are impressed with the California Air Resources Board on their proposed state implementation to promote the adoption of 900,000 medium and heavy duty trucks to low NOx over the next 15 years. In addition, 50% of the fuel must be renewable like our Redeem fuel. This is significant news and recognizes the threat NOx poses to air quality and the impact cleaner trucks and fuel could have on it.

The good news is, a solution is currently available with the Cummins-Westport 8.9 low NOx mission engine soon to be followed by the 11.9 and 6.7 liter engines.

Turning now to our renewable fuel business, we continue to see increase interest in demand for our renewable fuel offering. Through our robust network of stations, we have established a pathway to distribute Redeem, our renewable green gas in to vehicles. This is the best way to realize the full value of renewable fuel, which contributed $13 million of revenue in the second quarter.

I want to emphasize that our nationwide infrastructure has enabled us to benefit from this rapidly growing renewable fuel market, and differentiates us from competitors. We have expanded the Redeem program beyond California to other states such as Oregon and Texas. Companies like UPS, Kroger, Ryder, Republic Services and many transit agencies use Redeem and understand the significance.

Turning now to our station construction; we benefited during the second quarter from an increase in full station projects. So far this year we have completed 29 station projects and are on pace to complete 66 stations and station projects by the end of 2016. Our robust construction pipeline is a solid indicator that our customers continue to make investments in expanding their fleets and remain committed to their sustainability goals.

After all, we believe it was a strong and we execute on our stated plan to deleverage the balance sheet, grow our volumes and conserve our cash. This year we reduced our convertible debt by $214 million and achieved positive adjusted EBITDA for the fourth straight quarter. We grow our volumes over 11% and we increased our revenue 24%. Our margin per gallon improved year-over-year and our CapEx and SG&A were reduced, all this in the face of a continued low oil and diesel price environment.

Our largest customers continue to buy new trucks and invest in their natural gas operation, and we continue to gain new customers across our market of transit, refuse and trucking. There is much more work to be done, but we feel that we are successfully navigating our business and are well positioned to capitalize on the enormous opportunity in front of us.

And with that I’ll turn the call over to Bob.

Bob Vreeland

Thank you and good afternoon to everyone. Our financial results continued on a positive trend in the second quarter. The second quarter financial results benefited from higher volumes at higher gross margins per gallon, increased station construction sales and the alternative fuel tax credit or VTEC.

The second quarter volume of 82.9 million gallons was an increase of 8.5 million gallons from a year ago, and came from both CNG and LNG, partially offset by a slight decline in RNG gallons sold in to the non-vehicle fuel sector. We saw volume growth in all of our sectors, led by Refuse, NG Advantage and our [bulk] supply sector.

Part of the reason for the slight decline in RNG gallons was due to the fact that we have sold more RNG gallons as Redeem in to our fueling network and the Redeem gallons are included in our CNG and LNG gallons. Redeem volume for the quarter was 14.9 million gallons.

Our increasing second quarter revenue over a year ago was driven by higher volumes, increased construction sales and VTEC. Year-over-year our third party compressor sales were down principally due to the continued global oil price environment and strong US dollar on the international front.

Compressor sales in the North America which are reported within our construction sales, were up slightly from last year consistent with the increase in our construction activity. Our overall gross profit margin improved from a year ago due to a higher effective margin per gallon on higher volumes, as well as the benefit of increased construction sales and the addition of VTEC in 2016.

Our effective margin per gallon was $0.35 per gallon compared to $0.29 for the second quarter of 2015. Both quarters include the state and federal environmental credits, LCFS and the rent. The combined environmental credits contributed $12.2 million of profit margin in the second quarter of 2016, compared to 4.2 million in 2015, again demonstrating the economic benefits from the economic benefits from the environmental attributes of natural gas and Redeem.

Our SG&A of 25.3 million in the second quarter was 13% lower than a year ago and flat with the first quarter of 2016. This has been a continuing trend and is the result of the actions we’ve taken given the low oil price environment. We also record a $10.1 million gain on the retirement of $36.5 million of our 2018 convertible debt.

The higher revenues and gross profit margin and lower SG&A, along with the gain on debt repurchase led to GAAP net income of 1.5 million in the second quarter of 2016, compared to a GAAP net loss of 30 million a year ago, and also led to an improvement of 29.4 million in adjusted EBITDA for the second quarter compared to a year ago.

Excluding VTEC and the debt repurchase gain, adjusted EBITDA improved by 12.7 million when compared to the second quarter of 2015. Year-to-date we’re at 4.4 million of GAAP net income versus a loss of 61.1 million for the same period in 2015. Adjusted EBITDA has improved by $64.7 million on a year-to-date basis compared to last year.

Exclusive of VTEC and the debt repurchase gain, adjusted EBITDA has improved by 25.8 million to date through June compared to last year.

As Andrew mentioned, we had 182 million of cash and investments at the end of second quarter. In July we paid $38 million in cash and issued 14 million shares of common stock to pay-off the remaining balance of our 2016 convertible notes. We believe we are in a good position with our cash and investments, our operating cash flow for the first six months of 2016 improved by $30 million compared to last year and we’ve made good progress on our 2018 5.25% convertible debt which we’ve reduced by nearly 69 million to 181 million.

Looking forward and consistent with the results from the first two quarters, we anticipate our environmental credits in both natural gas and Redeem to benefit our results. VTEC will continue each quarter and we expect positive quarterly adjusted EBITDA for the balance of 2016.

And with operator, we’ll open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Eric Stine with Craig-Hallum. Please proceed.

Eric Stine

Just wanted to touch on volumes, great to see record overall volumes, but wanted to focus specifically on LNG, which was also a record. Anything in there that was one-time whether it was industrial volumes or is that an on-road number and then how should we think about LNG trending going forward?

Bob Vreeland

Eric, hi it’s Bob. As usual there are kind of bulk supply volumes that are in there and so that will sway the number here and there. So, we’re up a couple of million there, so some of that is from bulk supply.

Eric Stine

Got it. I know you’ve been opening stations on the LNG side; you’ve got some anchored tenants and maybe just curious commentary on how LNG volumes are trending?

Bob Vreeland

Well generally they’re trending up but at a slower pace, but they’re trending up. We are adding gallons on that, absolutely.

Andrew Littlefair

And as you know, Eric this is Andrew. We’ve had some growth in the southeastern United States in trucking with long haul LNG fleets, so I think these things tend to add fully, but we’ve had some good growth of that sector, so I think you’re seeing that. But as Bob says, we had a little bit - we always do, but there was about 1.8 million stationary LNG supply, which by the way is important for us. We know that there will be more of that in other utilities and so it’s a good business for us.

Eric Stine

And maybe just turning to your truck demo program, I know you’ve had in place but just maybe you can characterize the entrance levels there, whether you’ve secured a new customer as a result and maybe what it’s done to your pipeline.

Andrew Littlefair

We are waiting delivery of our latest demo for our demo fleet. But currently which is going to be a sweeper. One of the things we did Eric and maybe you saw one of them at the shows I can’t remember it. But some of the early natural gas vehicles that were taken in to the [day cap] fleet were in the rental fleet and weren’t always necessarily designed for a particular use. And so we made sure as we brought these demos in that they were designed for the kinds of use that some of our long haul customers use. And so therefore we got the right gearing ratios and other things for what they might expect.

One of the interesting things is that one of the NOx on natural gases, we’ve seen a lower miles per gallon as compared to some of the diesels and we’ve been pleased to report that in some of our recent demo. Please this is real data, we’re getting it on a daily basis. We’ve seen up to 6.3 to 6.4 miles, 6.5 miles a gallon, which is higher than other fleets have experienced with natural gas.

And that’s because it’s geared correctly and we have the dynamics involved and so where natural gas was getting a little bit of a bad name in terms of miles per gallon, that’s one of the things we’ve seen as we’ve been demoing these vehicles for the fleets.

We have about 36 different fleets in the queue right now. We’ve sold, a couple of weeks ago we had an order for one of our demo customers stepped up and bought five vehicles. So it’s helping us. We constantly have - every week we turn it in to another fleet and then we continue to have 35 fleets in the queue. So we like the program, we think its good way to help us customers.

Eric Stine

May be last one from me just related to LCFS, there’s has been a lot of noise about the future that and potentially weakening the compliance requirement and I know it’s part of a larger cap and trade discussion in California, but may be just thoughts on where things stand and how you think that shakes out going forward?

Andrew Littlefair

I’ve been lining up on this one with - I’m betting on the Governor. Governor Brown has been early proponent of this kind of thing and of course has a long track record of these kinds of environmental programs. And this has been a little bit of inside baseball, I think frankly, it’s been an effort to use a particular, a potential court ruling to extend, kind of trade away the Low Carbon Fuel Standard to extend may be 32. I really think though when you shake this all out, I don’t see the Low Carbon Fuel Standard going away.

And I don’t see the Governor doing that, I don’t think that’s part of the trade. I think that’s been promoted by certain quarters and so feel like you should count on the fact that when the dust clears AB 32 will be extended and the Low Carbon Fuel credit will be in place for a long time to come. Frankly its working, and I don’t see it going away.

Though I think there were some that thought it might be traded away here. I don’t think that’s going happen.

Operator

Our next question comes from Rob Brown with Lake Street Capital Markets. Please proceed.

Rob Brown

Congratulation on a nice quarter and nice station construction revenue. Do you see the ramp in that business as some indication that fleets are starting to look past the current oil prices and make decisions or just give some color on sort of why --.

Andrew Littlefair

I watched that and you and I have discussed this before. I do look at that. You know to me that’s a very good indicator. We look back in 2014. ’15, ’16 and our station construction and what our customers are doing. Remember there’s a lot of this, a majority of this is for our customers, not just for our own account. Well that means that these guys are willing to spend by trucks to fill up a station and hire us to build them a station spending millions of dollars, and so to me it shows great confidence by our Refuse customers, our transit customers and even our trucking customers, where they’ll continue to move forward.

Ryder announced I think today 100 million miles, UPS the other day talked about a billion miles. UPS I believe I’m right on this, still hasn’t bought a diesel truck in a couple of years. Our friends in the Refuse business, I think this year will be really a record in terms of full station construction for our Refuse customers. So we don’t see anybody going back. So to me it’s a sign of confidence.

There isn’t any right now other than there is important sustainability benefits. There aren’t any great incentive for these Refuse customers to continue forward like they are where they’re still buying 60% of all the trucks sold in America are natural gases, because they work and they’re saving money, and they haven’t really - Waste Management I think is still at about 90% of their purchases of natural gas.

So I take that all as a good sign, and maybe I didn’t say yet, but I noted there at our meeting earlier this morning that we have 81 stations underway, we think we’ll finish 66 or so this year, but we have 81 projects, which means that at about this time on a given year having 20 kind of in the bull pen, 30 in the bull pen is about where we’ve always been. So I think that is a bullish sign for what we see out there.

Rob Brown

And then on the rent credits, how do you see that market progressing, do you continue to see that pricing up there or is it just a shift to the Redeem gallons that you’re seeing RIN volume.

Andrew Littlefair

On the RIN credits, and I’ll admit I’m not an expert of all the trading that’s going on the RIN though they are strong as you know. We don’t really see anything that is going to make those really soft in any time soon. Now we’ve seen some softening in the Low Carbon Fuel Standard pricing because of the previous question about, I think some people thought that there is a chance that the Low Carbon Fuel Standard might go away.

I don’t believe that those will probably begin to strengthen. We think in the coming years and next year that there will be significant demand for those credits on the rents, but we think it should be pretty strong. Rob, one thing on that is this market’s developed and you watched this, I think it was two or three years ago we were selling 8 million gallons of renewable fuel. This year we’ll do closer to 60. We think there’s potential for that over the next couple of years to potentially double.

Our customers and I think it’s the case with natural gas as well that some of our really sophisticated customers are keeping a close eye on the sustainability picture and some of our most sophisticated fleets really like that renewable fuel, and it really fits in nicely to their own sustainability goals and so we have to knock on other peoples doors often. But in terms of our redeemed product our renewable natural gas we actually have customers seeking us out for it. And I think that’s important and that’s only going to continue to strengthen.

Rob Brown

And quickly on SG&A, do you think this is sort of the level that you can sustain at or can there be more taken out of that line.

Andrew Littlefair

We’re constantly looking at ways to trim that a little bit. I think probably for your modeling purposes this probably a number that is comfortable. But we’re going to see if there aren’t some other things that we can do to trim it slightly, but we’re growing and we’re adding, and so I have to remind people that most of the cuts have been made. The volumes going up, the station network has expanded, I think and we’re closer to 575 stations now.

So, it’s hard to continue to grow at the rate we’re growing and do much more on the SG&A, but we’re looking for a couple of ways to trim it a little bit. But I’d say for now, use that as a pretty good number.

Operator

Our next question comes from Pavel Molchanov with Raymond James. Please proceed.

Pavel Molchanov

Over the last couple of years you’ve sharply reduced your expansion, your CapEx. Now that cash flow metrics are clearly looking better than before, heading in to 2017 would you consider ramping your investment program back up?

Andrew Littlefair

I don’t know, I think we still as you know probably have a network that has a great room to grow in terms of its capacity. The existing 570 stations who are in network, about half of which we own, you could almost double the volume from here on your existing network, and then there could be CapEx adds in terms of pumps and some other things and tanks that would get you even substantial beyond that.

I think the CapEx spend that we have right now, this $25 million range is probably one that makes sense. It does allow us add nodes in for contracted customers. Obviously we’re building as I just mentioned we have 81 stations that’s underway, we’ll complete 60 some odd this year. To me that’s a robust growth. I’d love to get back to a point where we thought we needed to add another 100 here. But I think for this level of CapEx probably is very reasonable and I don’t see it having to grow much from there.

Our partner (inaudible) Jimmy [Aslan] told me, he said listen Andrew, a 150 of the right truck stops you can get great coverage across this country and so billions of gallons and so I remember that. And that we have about 70 or 80 of those already built, and so we’re a long way from several billion gallons there. But I think the current CapEx number that you’re seeing probably makes sense for the next year or so.

Pavel Molchanov

And then just turning to your balance sheet, I recall earlier in the year, you repurchased some of your 2018 convert, most of that is still outstanding. Are you going to be looking to kind of nibble at it in the near term or will you largely let it be, since you got a year and a half until then.

Andrew Littlefair

Yeah, we got a couple of years to go on the 2018 and you’re right we took it down from 250 to 181, I guess. We’ll be opportunistic, but I think we’ve made some good progress on. As you know we took out the 2016s, we’ve got a couple of years to go. We’re very mindful of the dilution and the trade-off that comes in here. We’re in good contact with all those bond holders, they are fairly centralized and so we’re in contact with them about different alternatives with them. But I would say that we’re not in any rush right at this point in time to do anything.

Operator

Thank you. I’d like to turn the floor over to Andrew for closing comments.

Andrew Littlefair

Thank you, Operator. Thank you everyone for joining us today. I want to thank you for listening to the call this afternoon and we look forward to updating on all of our progress for the next quarter. Thank you.

Operator

This concludes today’s teleconference; you may disconnect your lines at this time and thank you for your participation.

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