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Clean Energy Fuels (NASDAQ:CLNE)
Q2 2018 Earnings Conference Call
Aug. 7, 2018 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Clean Energy Fuels second-quarter 2018 earnings conference call. [Operator instructions] As a reminder, this conference is being recorded.It is now my pleasure to introduce you to your host, Robert Vreeland, chief financial officer. Thank you, Robert. You may begin.

Robert Vreeland -- Chief Financial Officer

Thank you, operator. Earlier this afternoon, Clean Energy released financial results for the quarter ending June 30, 2018. If you did not receive the release, it is available on the Investor Relations section of the company's website at www.cleanenergyfuels.com, where the call is also being webcast. There will be a replay available on the website for 30 days. Before we begin, we'd like to remind you that some of the information contained in the news release and on this conference call contains forward-looking statements that involve risks, uncertainties and assumptions that are difficult to predict.

Words of expression reflecting optimism, satisfaction with current prospects as well as words such as believe, intend, expect, plan, should, anticipate and similar variations identify forward-looking statements but their absence does not mean that the statement is not forward looking. Such forward-looking statements are not a guarantee of performance and the company's actual results could differ materially from those contained in such statements. Several factors that could cause or contribute to such differences are described in detail in the Risk Factors section of the Clean Energy's Form 10-Q filed today. These forward-looking statements speak only as 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. With that, I will turn the call over to our President and Chief Executive Officer Andrew Littlefair.

Andrew Littlefair -- President and Chief Executive Officer

Thank you, Bob. Good afternoon, everyone, and thank you for joining us. At the risk of sounding dramatic but what I truly believe is the case, the second quarter of this year was probably the most historic of Clean Energy's history, at least since we took the company public in 2007. As we announced on May 10, Total, the French energy giant, with a motto that it wants to become, "the responsible energy major," purchased a 25% stake in Clean Energy, making it our single largest shareholder.

Total, with large holdings on virtually every continent and which has made significant investments in a variety of alternative energy ventures, sent a strong signal that it believes in the future of natural gas fueling in North America, particularly in heavy-duty vehicles.The transaction was approved with overwhelming support of Clean Energy shareholders and closed in June. And since then, Patrick Pouyanne, Total's chairman and CEO, has continued to demonstrate Total's commitment to the new partnership. I was invited to participate in a joint press conference with Patrick during the World Gas Conference in Washington later in the month. And at that event, he repeated several times the reasons for Total's investment, that the U.S. is blessed with an abundance of natural gas, which Total is also in the business of extracting. It's been proven as a reliable transportation fuel. It burns cleaner than the incumbent fuel diesel and is cost efficient. And with the announcements by many cities in Europe that they will be banning the use of diesel, Total knows all too well the need to find a viable fuel alternative.Total's investment in Clean Energy alone send a positive message about the use of natural gas as a fuel.

But what will have an even greater impact to the overall transportation industry is our new partnership in a heavy-duty truck financing program that we launched a couple of weeks ago. With $100 million in credit support from Total, the Zero Now Financing program, as we call it, should help to put up to 2,500 new heavy-duty natural gas trucks on the road in North America and fueling at Clean Energy stations. As we explained when we launched the program, the final hurdle for fleet owners is making the switch to -- making the switch to natural gas has been the incremental cost of the truck. We now have removed that additional cost with this program and at the same time, guaranteeing a fuel price that is at a significant discount to diesel for the term of the financing.Initial reception from the industry, including truck dealers, OEMs and others, has been very positive, and our national sales team has just hit the ground with this new offering.

This new financing program, along with the continued regulatory pressure on emissions and highly volatile diesel prices, should grab the attention of heavy-duty truck fleets around the country. As a Zero Now Financing tag line says, zero emissions, zero added cost and zero excuses. Now for more details about this program, you can -- they can be found on the Zero Now Financing page on our company's website. Our overall business continue to grow in the second quarter with volumes of 89.4 million gallons, increasing slightly over last year. On an adjusted basis, volumes grew by 4% when adjusting for gallons in last year that did not repeat in 2018 due to our BP transaction and two LNG contracts.

As we have been communicating over the last year, we believe that another major catalyst for adoption of natural gas by the heavy-duty truck industry is the Ports of L.A. and Long Beach. These ports, which have more heavy-duty trucks coming in and out of them than anywhere else in the country, have taken the first steps to implement the provisions of their updated Clean Air Action Plan that was adopted in late 2017. The new rules go into effect in October, that require newly registered port trucks to be model year 2014 or newer.

The action sends a clear message that the ports will be implementing the measures contained in the updated Clean Air program, including container fees scheduled to be implemented in early 2020 on trucks that aren't zero or near zero emissions coming into the ports. A reason that we believe that a significant number of fleets that service the Ports of L.A. and Long Beach will be choosing natural gas trucks under this new provision is because the number of applications that have been submitted for grants for natural gas trucks. During the last few months, close to 500 applications were submitted to the South Coast Air Quality Management District, which oversees the grant program.

A large percentage of those were done with the help by Clean Energy's grant department and after the grants were received, those new trucks are expected to begin fueling in our stations in the Southern California area. We expect the first trucks bought with these grants and equipped with the new Cummins Westport zero-emission engines to be delivered in early fall of this year. As we previously announced in Q2, there are a handful of truck fleets that have been participating in the ports' pilot program and have already deployed trucks powered by the new CWI zero-emissions engine. The project's goal was to introduce this ultraclean technology to the rest of the industry and these participating fleets have raved about the performance of the engines. There really is no other alternative that is available today that's as competitively priced and achieves greater emissions reductions. We are pleased that our Redeem renewable natural gas continues to be accepted by more and more fleets in different locations.

In fact, Redeem's volume is on track to grow by 25% in 2018 to approximately 100 million gallons. We signed our first customer in New York State in the second quarter, our longtime partner in the Municipality of Brookhaven, which will begin to fuel 80 new refuse and recycling trucks with Redeem. Other transit and refuse truck fleets that have either made the switch to or expanded their use of Redeem in Q2 and will be receiving the benefits of significant greenhouse gas reductions for their fleets. These fleets include Orange County Transit Authority, Victor Valley Transit, North County Transit District in San Diego and the City of Culver City, all in California, as well as the City of Phoenix, Arizona, which fuels 500 natural gas buses.

Additionally, we have recently signed contracts with dairy farms and other sources that will begin to flow more RNG over the next 12 months. Our station construction pipeline continues at a good steady pace with a large station opening in Johnson County, Kansas in Q2 that will fuel multiple fleets of refuse trucks and transit buses.A subsidiary of Union Gas on Ontario, Canada contracted with us last quarter to build three new fueling stations along an important shipping corridor in Canada. We doubled the fueling capacity at our station in Bellefonte, Pennsylvania to accommodate growing demand by our customers there. And also in the second quarter of this year, we won a contract to design, build and operate and maintain a station for the City of Redondo Beach, California. All told, we are on track to complete over 50 projects this year that include building new stations for our customers and upgrading others to accommodate additional fueling.Let me finish by addressing the overall financial state of the business.

A year ago in August 2017, we discussed the low oil price environment and slower adoption of natural gas vehicles principally in the heavy-duty truck sector. Consequently, we embarked on a station optimization program and took other strategic measures to improve our operating results and cash flows going into 2018. Those efforts we put forth in 2017 are working and have resulted in better operating results and cash flows, and together with the Total investment, the company is in its strongest financial shape in recent history. Compared to the second quarter last year, our operating results have increased by 40%.

Adjusted EBITDA more than doubled to $7.4 million. Cash flow from operations and overall free cash flow have improved. And at June 30, our cash and investments exceeded our convertible debt balances by $42 million.This is an opportune time in the natural gas vehicle fuel market, with higher diesel prices and growing focus on cleaner alternative heavy-duty vehicle fuels. Natural gas has the immediate solution, Clean Energy has the station network, and we're in the best financial shape to take advantage of this momentum, with one of the world's largest energy companies as our largest shareholder and active participant in supporting our efforts.

Bottom line, we are back on the offensive.And with that, I'll turn the call over to Bob.

Robert Vreeland -- Chief Financial Officer

Thank you, Andrew. Our financial results for the second quarter of 2018 were in line with our expectations and we maintain our financial outlook for the full year. Volume of 89.4 million gallons was 1% above last year. We continue to see volume growth in CNG mainly from the refuse sector but also from NG Advantage.

Our LNG volume was down principally due to two LNG contracts that were not renewed in refuse and transit sectors. Redeem volume grew 22% for the second quarter to 24.1 million gallons versus 19.7 million gallons a year ago. Our revenue for the second quarter of 2018 was $70.5 million compared to $81 million in the second quarter of 2017. Revenue for the second quarter of 2017 included $5.2 million of revenue from our former compressor subsidiary that is now an equity method investment. Also, 2017 construction revenues were $6.5 million higher, which we anticipated going into 2018, knowing that 2017 was a strong year for full station sales.

We continue to have a steady backlog in station construction activity for 2018 albeit at a lower sales value compared to 2017. Looking at our volume-related revenue of $62.6 million versus $63.4 million for 2017. This slight reduction in revenue was due to a lower effective price per gallon compared to last year. We also saw a lower effective cost per gallon, which contributed to an improvement of $1.6 million or 7% in our volume gross profit margin compared to 2017.

Our effective margin per gallon increased $0.015 to $0.265 versus $0.25 in 2017. So despite lower volume-related revenue, our volume-related gross profit margin dollars improved.Our overall gross margin of $24.8 million versus $23.7 million a year ago improved, because of the improvement in our volume margin, as I just noted, plus additional alternative fuel tax credit revenue, partially offset by a reduction in construction project margins and the absence of gross margin from our former compression subsidiary. Our SG&A of $19.9 million in the second quarter of 2018 was $3.4 million or 15% lower than a year ago. This reduction is a result of the cost saving and strategic actions we took in the third and fourth quarter of last year.

The second-quarter 2018 was slightly higher due to some one-off fees incurred during the quarter. We expect to be within a range of $73 million to $79 million of SG&A for the year. The loss from equity method investments in 2018 is primarily driven from our 49% share of the Italian compressor company loss for the quarter, which includes our former compressor subsidiary. The results of the newly formed Italian compressor company improved significantly in the second quarter and are expected to reach positive net income on a quarterly basis in 2018. These are not cash-related operating results for us.

Our GAAP net loss for the second quarter of 2018 was $12 million compared to a GAAP net loss of $17.8 million in 2017. This 33% improvement is largely the result of the actions we took last year to improve the operating results of the company. Our adjusted EBITDA for the second quarter of 2018 was $7.4 million compared to $3.2 million in 2017, again noting the improvement for 2018 resulting from the actions we took last year to improve our operating results. At June 30, our cash and investment balance was $252.7 million, which includes the Total investment as well as the collection of our alternative fuel tax credit revenues from the first quarter.

Our convertible debt outstanding at June was $210 million or $42 million less than our cash and investment balance as Andrew mentioned. We're in a strong cash position and continue to see positive operating cash flow for the year.I'll close by saying we're continuing our plan to improve the financial performance and cash flows of the company as we laid out at the end of 2017. And of course, having Total supporting our efforts is a game changer and gives us an even greater opportunity to address increasing the adoption of natural gas heavy-duty vehicles. With that operator, we'll open the call to questions. 

Questions and Aswers:

Operator

Thank you. [Operator instructions] The first question comes from Eric Stine of Craig-Hallum. Please go ahead.

Eric Stine -- Craig-Hallum Capital Group LLC -- Analyst

Hi, Andrew and Bob.

Andrew Littlefair -- President and Chief Executive Officer

Hi, Eric.

Eric Stine -- Craig-Hallum Capital Group LLC -- Analyst

Hey. Maybe just starting with the ports, it's been a couple of quarters since you've had the agreement in place with the Harbor Trucking Association. I just would love to hear kind of how that's played out, the importance of that and maybe the visibility it gives you into what the members of that association are going to do with the ports and you eventually getting the fueling volumes when it happens.

Andrew Littlefair -- President and Chief Executive Officer

Right. Well, Eric, I think kind of the proof is in the pudding. We have a good relationship with the Harbor Trucking Association. As I think you know, but others may not, we have a relationship with them to be really their fuel provider of choice for their member companies.

I think that's why, Eric, we've been very pleased with the 500 grant applications in for the 500 trucks that are now in queue to be funded for the port. I think if we go back over the last couple of quarters as the Clean Air action plan got unveiled, we said that we thought we'd be doing a good job if we got a few hundred new Cummins Westport 12-liter trucks put into the port this year, because remember, we're about a year and a half before the fee goes into effect, and then they have to do this. And so I like the way the uptake's been going. You'll see those first trucks come in the latter part of this -- of the third quarter.

I think, it's also a result of our fuel program that we have down there, why we have the uptake. We have more -- we haven't stopped. There are more trucks, more grant applications going in. And so we're feeling pretty good about the way that that program's beginning to roll out.

And I'm very looking forward to having these new trucks get into the hands of our customers. The early 20-or-so, 25 trucks that are now rolling around the port and have for the last, oh I don't know, 90 days or so have really done well as other -- as people tried them out. And I just know that as they begin to look at facing 2020 and knowing that they have to have either pay a very large fee for every movement of a truck in the port or they can get an electric truck, which isn't available today or they can get a natural gas truck that could save them $1, $1.50 a gallon perhaps, that does the work that they need to do, I just know that we're going to compare very well on that. So I'm looking forward to it, and I feel like we're making good progress.

Eric Stine -- Craig-Hallum Capital Group LLC -- Analyst

And you kind of just touched on it. I know, it's kind of been a battle to get natural gas in place versus some of the other technologies, which like electric, which is much more expensive. I mean, do you feel like that's kind of turned or that will turn once you get trucks on the road?

Andrew Littlefair -- President and Chief Executive Officer

Well, I've long believed that, and of course, as you sit here and you read the stories about the futuristic offerings of hydrogen and one test fuel cell truck and the magic electric truck offering that might be built sometime in '19 -- in 2019, you know. And frankly, the regulators wanting to push this and tilting some of the grants toward paying up for astronomical costs of an electric offering. And sort of the reality is there isn't a heavy-duty truck that works today that you could buy. And I know that we're going to compare favorably to it when it comes out, because, look, we also know that these truckers operate on very thin margins, certainly in the ports, they really do.

And this idea somehow that it's just the same to use an electric truck that carries with it a two times price tag versus what we're offering and magical multimillion dollar fueling stations are going to be built by the public through public utilities, I just think that as that really begins to roll out and people can't really look at that, we're going to look very well. So it's been a little -- it's a little frustrating, and it's a little frustrating probably for our shareholders, and it certainly is if you read about this. I will say, Eric, and I think you and I have probably read some of the same material, have you noticed some of the recent stories about how the rollout of some of the electric transit buses have been going?

Eric Stine -- Craig-Hallum Capital Group LLC -- Analyst

Yes.

Andrew Littlefair -- President and Chief Executive Officer

There is every reason to believe that some of those challenges that you're seeing in these places, where these buses are parked, and not operating as they've been -- as they've really been -- as proposed. Those are the same challenges that -- look, an electric vehicle is a very elegant solution for a light-duty vehicle. I think, it poses a lot of other challenges when it gets to heavy-duty.

Eric Stine -- Craig-Hallum Capital Group LLC -- Analyst

Right. Right. Maybe just on Total, I mean, obviously, very significant on a lot of levels, the financing program. But just curious, now that you've been in this for a few months, spent time with them, are there areas that you think will impact your business that maybe you didn't think of a couple months ago when this started?

Andrew Littlefair -- President and Chief Executive Officer

Well, we've been very pleased in working with them at many different levels. And we're beginning to work more closely with our American [Inaudible] Total has 7,000 U.S. employees, and so we're beginning to work with some of our friends based in Houston. We're certainly working very closely with them with the fuel offering that we're getting ready to make.

By the way, I think that's very significant to note that as part of this Zero Now program on the truck, we're going to be offering a fixed fuel contract to our customers that really runs the term of the lease, never really done -- been done before at a significant discount to diesel. And that's being done in coordination with our friends at Total. So that's just one example. We're working closely with our compressors subsidiary, that's, you know, now headquartered in Italy.

Total is rolling out fueling stations across Europe. We know we have a very good compressor and so we're working closely with them to see if that would make sense as well. So we've talked to them. It turns out that Total now represents 10% -- moving 10% of all the LNG around the world.

They have great experience. Their recent deal they just announced on LNG bunker barging. We've been talking to them about that potential here. We're beginning to see some marine applications of LNG in the Port of L.A.

You know we have the only LNG plant really in California. That's small in comparison to the -- while it does -- can do 180,000 gallons a day and can be actually brought up to 270,000 gallons a day, that's small in terms of world scale LNG. But the bunkering aspect that Total could bring to bear could be very important. So yes, I think there are going to be lots of ways to work with them.

And you know what's really happened, Eric, is as we've talked to our customers as we -- we have -- a lot of the customers that we're beginning to reach out to in this truck program are very large, significant companies in their own right. Having a -- one of the largest companies in the world working with us does not go unnoticed. And so it's been very helpful.

Eric Stine -- Craig-Hallum Capital Group LLC -- Analyst

Great. Maybe just last one for Bob, just bookkeeping the two nonrenewals for LNG. Any way you can quantify that for us?

Robert Vreeland -- Chief Financial Officer

Those were -- yes, they're fairly concentrated, and they were about 1.5 million gallons in a quarter.

Eric Stine -- Craig-Hallum Capital Group LLC -- Analyst

In a quarter? OK.

Robert Vreeland -- Chief Financial Officer

Yeah.

Eric Stine -- Craig-Hallum Capital Group LLC -- Analyst

OK. Got it. Thank you very much.

Andrew Littlefair -- President and Chief Executive Officer

Thanks, Eric.

Operator

The next question comes from Rob Brown of Lake Street Capital Markets. Please go ahead.

Rob Brown -- Lake Street Capital Markets -- Analyst

Hi. Good afternoon.

Andrew Littlefair -- President and Chief Executive Officer

Hey, Rob.

Rob Brown -- Lake Street Capital Markets -- Analyst

On the Zero Now program, lease program, could you update us on the time line and how you expect that to roll out in terms of sort of truck kind of volumes and then maybe the size of the fleets you're targeting for customers?

Andrew Littlefair -- President and Chief Executive Officer

Sure. We announced that program, as you know, a couple of weeks ago. And we have to announce it before we could really start our pedaling right? So we've just now begun to -- we turned our sales force loose here in the last week or so. So we're out -- we've, as you could imagine, we've targeted for-hire carriers and company-owned fleets.

They tend to be large fleets. Many of whom have had experience with natural gas. Some of whom are current customers, some are not. They tend to be customers that buy a lot of vehicles, that have perhaps as many as thousands of heavy-duty trucks.

That profile would be fleets that they burn between 15,000 and 20,000 gallons a year. That's -- they have good credit. They have fixed routes that tend to overlap on our station network, which is fairly easy to do, because we have such good coverage. We've broken that list.

I'm not going to get into gory details, because I don't want to turn over my playbook, but we've broken that list down to the first set of a couple hundred targets, and we're making those meetings now. I think, the early return is, we're asking people to make a significant investment, right? So this isn't about reservations. This is about buying trucks that are $100,000, $110,000 a piece and entering into fuel contracts. And so this is something that where you have to get the senior management of these large companies and purchasing people involved and they have to make a deal with a truck company and work with the OEM.

So it takes a little bit of complication, but we've made it fairly simple, where a fleet customer can purchase a truck at a diesel-like price and enter into a fuel contract that we think will be very reasonable and significant savings for the length of the deal. So we've really taken a lot of the objections and risk out. And the early returns, as I was going to say, has been that people really find our fuel price and fuel offering very compelling. And so I'm optimistic, because we're in the early days of it, and we're in really the first week of customer meetings.

We met with some very large fleets, and knock on wood, so far, so good. And we hope to begin to make some of those announcements over here in the next quarter or so, and we'll see how we do.

Rob Brown -- Lake Street Capital Markets -- Analyst

OK, great. Thank you for that overview. Switching to Redeem, how is the RNG supply market? Do you feel there's any constraints there? Or is that developing pretty well?

Andrew Littlefair -- President and Chief Executive Officer

Well, there are constraints, as we sit here in the middle of 2018. However, there is a lot of supply and low -- or high carbon intensity supply coming on stream. The EPA set those new compliance for next year at, I think, about a 35% increase over where it is today. I think, the industry will meet that.

And I think, we believe that that'll be the case. You'll see that kind of growth or even a little bit more than that, Rob, over the next couple of years. So over the next few years, you'd see that volume continue to grow significantly. But as we sit here today, we need a little bit more supply.

We work very closely with our partner, BP, for that supply. As I mentioned in my remarks, we'd wind up some additional supply that'll come on later 2018, early 2019, which is good -- with good carbon intensity numbers. So our customers really seem to like it, like this fuel. They really do understand that it's a very compelling tool in sustainability.

And so we're doing well with it. The rent pricing and low-carbon fuel pricing is doing well, so that's a bright spot in our business right now.

Rob Brown -- Lake Street Capital Markets -- Analyst

Great. Thank you. I'll turn it over.

Operator

The next question comes from Pavel Molchanov of Raymond James. Please go ahead, Pavel.

Pavel Molchanov -- Raymond James -- Analyst

Thanks for taking the question, guys. First, on service revenue. $9.3 million, you mentioned that was low. I actually think historically that may be the lowest in about six years.

What's it going to take for that line item to recover?

Robert Vreeland -- Chief Financial Officer

Well, Pavel, a fair amount of that related to our compression entity. A good amount of that decline was in the -- was the fact that we don't -- the prior-year number has our compressor company in it. So the volume-related, our core business number actually is performing as it always has. We just took out mainly the compressor company.

That's why you're seeing that dynamic on the P&L., because we've got -- last year has almost a $5 million or so of services related to the compressor business.

Pavel Molchanov -- Raymond James -- Analyst

OK, fair enough.

Robert Vreeland -- Chief Financial Officer

And this quarter does not.

Pavel Molchanov -- Raymond James -- Analyst

Right. OK. And then a kind of more macro. We're 90 days from the mid-terms, obviously, Congress has not taken up tax extenders yet.

Is there any hope that they will do so before the election? Or is it going to be in a lame duck?

Andrew Littlefair -- President and Chief Executive Officer

Well, I'm going to stick with my -- what I've been telling you the last few quarters. I think, there's a good chance that will get addressed and probably wouldn't be in the lame duck.

Pavel Molchanov -- Raymond James -- Analyst

OK. See what happens. Thank you, guys.

Andrew Littlefair -- President and Chief Executive Officer

OK. Thank you.

Operator

There are no more questions at this time. I'd like to turn the floor back over to Andrew Littlefair for closing comments.

Andrew Littlefair -- President and Chief Executive Officer

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

Operator

[Operator sign-off]

Duration: 34 minutes

Call Participants:

Robert Vreeland -- Chief Financial Officer

Andrew Littlefair -- President and Chief Executive Officer

Eric Stine -- Craig-Hallum Capital Group LLC -- Analyst

Rob Brown -- Lake Street Capital Markets -- Analyst

Pavel Molchanov -- Raymond James -- Analyst

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