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Clean Energy Fuels Corp  (NASDAQ:CLNE)
Q3 2018 Earnings Conference Call
Nov. 07, 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 Third Quarter 2018 Earnings Conference Call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instruction). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Bob Vreeland, Chief Financial Officer. Mr. Vreeland, you may begin.

Bob Vreeland -- Chief Financial Officer

Thank you, operator. Earlier this afternoon Clean Energy released financial results for the quarter ending September 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. Company's non-GAAP EPS and adjusted EBITDA will be reviewed on this call and excludes 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.

Andrew Littlefair, our President and Chief Executive Officer is out today with a bad case of the flu. We're looking forward to his speedy recovery. In that regard, joining me today is Clay Corbus, our Senior Vice President of Strategic Development and named Officer of the company. Most of you know Clay, who has been with Clean Energy since going public in 2007. Also joining me is Nate Jensen, our Senior Vice President, Corporate transactions, and General Counsel.

I will now turn the call over to Clay.

Clay Corbus -- Senior Vice President, Strategic Development

Thank you, Bob, and good afternoon everyone, and thank you for joining us. We are pleased to report the growth in our volume continued in the third quarter of this year to 92.3 million gallons. This is a 4% increase over the same quarter of last year when adjusted for gallons that did not repeat in 2018 due to our BP sale transaction and two LNG contracts that Andrew mentioned last quarter. We saw strength in the established markets of refuse and transit, as well as NG Advantage and our bulk LNG deliveries. I'll expand on this in a moment.

We also had a very productive quarter in strengthening our financial performance and balance sheet. Our revenues of $77.3 million were driven by a 7.4% increase from a year ago in our volume revenues, reflecting higher pump prices and Redeem renewable natural gas revenues. Our station construction revenues trended up to $9.4 million from $5.8 million in the second quarter. We see a $9 million quarter in station construction revenue as a good barometer of continued investment by our customers in their natural gas vehicle infrastructure.

And lastly on revenue, we no longer consolidate the IMW compressor business, and as such, we don't report any compressor business revenues in 2018, whereas in the third quarter of 2017, IMW contributed $5.9 million in revenue. We saw a $10 million improvement in our operating results in the third quarter of 2018 from a year ago. Even after taking out the asset impairment and other charges from 2017. With adjusted EBITDA of $7.3 million in the third quarter of 2018, that puts us at $47 million of adjusted EBITDA year-to-date. And if you remove the alternative fuel tax credit of $27 million from 2018, we still doubled our adjusted EBITDA in 2018 versus 2017.

Our focus on improved operating results and cash flows remains a high priority and it's paying off. And speaking cash flow, we ended the third quarter with $254 million in cash, which allowed us to pay off in full, the remaining $110 million of our 5.25 convertible notes on October 1. Now a few weeks ago, we made an announcement that we're not sure it was fully appreciated. The growth of our Redeem renewable natural gas business has been impressive quintupling from 22 million gallons in 2014, the first full year that it was available to an expected 110 million gallons this year. Customers are waking up to the fact that they can operate their fleets on the renewable fuel that reduces the carbon footprint by at least 70% over diesel, that is easy to use and is very competitively priced. A growing demand is from across the board, transit agencies like LA Metro, which recently exercised a four year option for Redeem.

Airports like DFW, heavy duty trucking fleets by Kroger and especially refuse fleets, which understand the entire lifecycle of waste to fuel better than anyone else. A great example is Republic Services, which is fueling the refuse trucks with Redeem across 20 different states. No other company is better positioned to take advantage of this phenomenon in Clean Energy. The great thing about RNG is that it can be nominated to flow through our existing CNG and LNG infrastructure, and with access to 530 fueling stations around the country, we can easily provide Redeem to most any new or existing customer. And the supply market is responding with a record number of new RNG Production projects at dairies, other agricultural facilities, and landfills, currently under construction and on the drawing board.

While Clean Energy is very well positioned on the demand side, the company has made a significant amount of investment in supply of RNG is BP. Beginning with the purchase of our RNG production facilities in early 2017, and leveraging their extensive trading capabilities, BP is the ideal partner for Clean Energy to work with to satisfy the growing demand for RNG. Our new joint marketing agreement, we recently signed with BP extends our relationship in years and in volume, while we are free to work with other RNG suppliers, this agreement will give us surety of supply to continue to market and sell Redeem in greater volumes across the country for at least next decade. The new agreement allows us to benefit financially to an increased share in the environmental credit revenues on our joint demand and we are very pleased with this deepening relationship with BP ad remain bullish on the growth of our Redeem business.

So moving on to some of the other highlights during the third quarter, we obtained new customers of note and grew with some established ones. We won a seven-year contract to provide natural gas fueling for First Transit, which operates shuttles for employees, cargo, and airline passengers at Philadelphia International Airport and has decided to switch from diesel to CNG as part of their sustainability initiative. The agreement is expected to add 2.5 million gallons a year to power 38 new CNG buses.

Our refuse business continued to expand with Burrtec (ph) Industries, (inaudible) services, and Redeem fuel agreement with Valley Vista Services. We also signed a larger fuel agreement with existing customer Waste Connections. We opened a newly constructed private LNG station in San Bernardino, California, for our customer Burrtec Waste Industries that will fuel up to 50 LNG refuse trucks, and an expected volume of 600,000 Redeem gallons a year. We also signed new contracts for fuel and maintenance services with the cities of Ontario and Sacramento refuse operations. We signed a fueling agreement with Aramark, the large food and uniform services company, which is adding their first natural gas vehicles that will fuel at existing Clean Energy stations in Texas. Clean Energy was instrumental in securing grant funding for the new Aramark NGVs through the Texas Clean fleet program.

And speaking of grants, our extensive work on securing funding for new heavy-duty trucks in California has begun to pay off to the South Coast Air Quality Management District's, Carl Moyer Program, which focuses on improving air quality by replacing older heavy-duty diesel trucks with cleaner technologies. The AQMD recently recommended a total of 148 heavy duty port trucks to receive funding. Also on the heavy-duty truck side, Mountain Valley Express, a freight company with operations in California, Nevada and Arizona decided to expand its fleet by purchasing the new near zero natural gas LNG heavy duty trucks, primarily to improve their emissions profile and lower their costs.

Finally, we would like to give you an update on an initiative that we launched in the third quarter, Zero Now Financing and is being made possible through the support our new partner and largest shareholder Total. The innovative program allows companies to lease or purchase heavy duty trucks equipped with the new Cummins Westport near zero natural gas engine, which reduces NOx emissions by 90%, at the same cost of the truck equipped with the latest diesel engine. So, really we've eliminated the incremental cost of the natural gas truck. If this wasn't a big enough incentive, customers will be able to purchase their natural gas fuel a deep locked in a discount to the price of diesel for the life of their financing. We have spent these first few months educating truck dealers across the country about the program as well as lining of participation with some of the major OEMs like Peterbilt, Freightliner and Volvo, all of which are supporting the program. We cannot overemphasize that this is the first time in our industry that the engine provider, the fuel systems providers, the OEMs, the dealers and Clean Energy the fuel provider have come together to jointly lower the incremental cost of the trucks in order to drive up the number of natural gas trucks on the road.

Our national sales team is now in the process that mean with dozens of trucking companies and the initial reaction has been very positive. We believe, we have removed significant hurdles to make the switch to clean burning renewable natural gas with Zero Now Financing. Some of those who have been the most skeptical have engaged in serious conversations and we have signed the first agreements under the new program. Look for announcements over the coming weeks and months of new heavy duty fleets making the switch. So overall, the third quarter was very productive in continuing to improve our financial results and balance sheet as well as laying the groundwork for future continued growth.

And with that, I will turn the call back to Bob.

Bob Vreeland -- Chief Financial Officer

Thank you, Clay. Our financial results for the third quarter of 2018 were in line with our expectations and we maintain our financial outlook for the full year. In particular, on adjusted EBITDA, our guidance for 2018 was a range of $55 million to $60 million. There is an opportunity for positive impacts to adjusted EBITDA from incremental volumes and margins from our Zero Now Financing program and our new joint marketing arrangement with BP. But presently, we expect to be within the range of $55 million to $60 million for adjusted EBITDA.

Volume for the third quarter of 2018 of 92.3 million gallons was 1% above last year. We saw volume growth in the third quarter in CNG led by the refuse sector and NG Advantage. We also saw growth in bulk LNG deliveries. The gain in our bulk LNG deliveries in this quarter helped to offset the impact of two large LNG contracts that we noted in previous calls that were not renewed in the refuse and transit sectors.

Redeem volume grew 47% in the third quarter to 28.3 million gallons versus 19.3 million gallons a year ago. Our revenue for the third quarter of 2018 was $77.3 million compared to $81.8 million in the third quarter of 2017. As Clay pointed out, revenue for the third quarter of 2017 included $5.9 million of revenue from our previously consolidated compressor subsidiary that is now in equity-method investment. Our construction revenues picked up in the third quarter of 2018 to $9.4 million, although slightly under 2017 due to timing and the different types of projects year-over-year.

Our volume-related revenue was $67.8 million versus $63.1 million a year-ago, reflecting higher pump prices and greater renewable natural gas revenues. Our overall gross margin in the third quarter of 2018 was $24.5 million compared to $8.5 million last year. Last year, our gross margin included $13.2 million of inventory provisions, exclusive of those provisions in 2017, our 2018 gross margin has improved, principally from a better margin per gallon on volumes delivered.

Our gross margin per gallon was $0.26 per gallon in the third quarter of 2018 versus $0.23 per gallon in 2017, 13% improvement. Higher pump prices and redeem renewable natural gas sales continued -- contributed to the gains in 2018. Our SG&A of $18.4 million in the third quarter of 2018 was $6.4 million or 26% lower than a year-ago. This reduction is a result of the cost saving and strategic actions we took in the third quarter and fourth quarter of last year.

The loss from equity method investments in 2018 is primarily driven from our 49% share of the Italian compressor company results, which included our formally consolidated compressor subsidiary. The results of the newly formed Italian compressor company improved from the previous quarter and are expected to reach positive net income in the fourth quarter of 2018. These are not cash related operating results for us. We also recorded $1.2 million of additional facility relocation costs associated with the formation of the Italian compressor company.

Our GAAP net loss for the third quarter of 2018 was $11 million compared to a year-ago GAAP net loss of $94.1 million. Last year included asset impairment and other charges of $74 million, but all things considered a large improvement in 2018. Our adjusted EBITDA for the third quarter of 2018 was $7.3 million compared to a negative $74.1 million in 2017. Again, noting the improvement for 2018, even when considering the 2017 had $74 million of various charges. Bottom line, our station optimization and cost saving actions put in place at the end of 2017 are helping our financial results and cash flows.

Clay mentioned, our cash and investment position at the end of September of $254 million, as well as the fact that we paid of 5.25% convertible notes of $110 million on October 1. With that paid-off, we have $50 million of convertible debt due in July 2019 and another $50 million due in July 2020. We see this as a very manageable debt position looking forward. We had positive operating cash flow for the quarter, which we also expect to be positive for the full-year.

With that operator, we'll now open the call to questions.

Questions and Answers:

Bob Vreeland -- Chief Financial Officer

(Operator Instructions). The first question is from Mr. Eric Stine, Craig Hallum. Please go ahead, sir.

Eric Stine -- Craig-Hallum -- Analyst

Hi Ron.

Bob Vreeland -- Chief Financial Officer

Hi Eric.

Eric Stine -- Craig-Hallum -- Analyst

Hey, so just wanted to start with the expanded BP agreement. Obviously as you said, demand hasn't been an issue, but just kind of curious until this agreement was in place, is there a way to quantify how maybe that was limiting your volumes? And then, with this in place, how do you think that potentially equates to grow or what type of acceleration might you see in that going forward?

Clay Corbus -- Senior Vice President, Strategic Development

Well Eric, you know, it didn't necessarily limit what we're able to do, but it did limits sometimes the duration of what we're able to offer to our customers, and particularly if they saw their fleets growing. Because as we had contracts that were lined-up, we didn't know if we'd be able to get RNG beyond those contracts. And so what this really does is it allows us to open up our entire infrastructure to RNG knowing that we're going to have the surety of supply coming through on the back-end. And really for BP, the good thing about it is that, as they're looking to expand their portfolio of RNG projects, they know that when they do that they're going to have the downstream demand to be able to fill those projects. So it really works out well for both of us to maximize our fueling infrastructure and for them to maximize their supply infrastructure. So we do think that you'll start to see acceleration, but as with anything you know just as it takes a little bit of time, but we're very excited about what this means over the long-term for RNG.

Eric Stine -- Craig-Hallum -- Analyst

Absolutely. And can I just clarify. Did I hear you say that you, that the economics are -- will be improved now going forward. I mean my understanding is you're basically splitting the credits 50-50 with you as the transportation pathway, but it sounds like maybe that's increased?

Clay Corbus -- Senior Vice President, Strategic Development

Well what it does is as -- to the extent it extends what we would be possibly paying with others when we're sharing. To this end, we're just splitting it right down the middle with BP, and it's fair for both of us.

Eric Stine -- Craig-Hallum -- Analyst

Okay, so it's basically same setup, you're just applying it to all your volumes?

Clay Corbus -- Senior Vice President, Strategic Development

Our RNG volumes?

Eric Stine -- Craig-Hallum -- Analyst

Right. Yes.

Bob Vreeland -- Chief Financial Officer

Right. We have the opportunity to expand the demand.

Eric Stine -- Craig-Hallum -- Analyst

Okay. Maybe next, just on the Zero Now Financing. And I know it's just started, but is it -- well, I mean, so I think it funds what 2,500 trucks. I mean is that something that based on early demand, you think you fill up pretty rapidly. And I'm also curious kind of what the geographic interest is in that program?

Clay Corbus -- Senior Vice President, Strategic Development

Well, I'd say, it is -- first of all, we are very excited about it. We've got really strong demand, we've got people coming in, fleets coming in that weren't -- sort of had put natural gas up on the shelf and with this, with diesel prices increasing with this being out, they're sort of jumping back into the party. I think it is a big decision, it's big commitment. So I don't want to say that we are going to fill this up in next month. But we are getting substantial interest across the Board and in really across the country. I would say the highest percentage of demand is probably in California, just because that's where the fuel was most expensive, but we're also seeing a lot coming in Texas and Arizona and other sort of small amounts. But the majority of it really is in California. And it's good, we signed a couple of deals, we've got some good orders and we do have confidentiality agreements. So we are not disclosing names or volumes at this point, but I just -- we are optimistic and we're very excited about what's going on.

Eric Stine -- Craig-Hallum -- Analyst

Okay. Thanks a lot.

Bob Vreeland -- Chief Financial Officer

Thank you, Eric.

Clay Corbus -- Senior Vice President, Strategic Development

Thank you.

Operator

Next question is from Rob Brown, Lake Street Capital. Please go ahead, sir.

Rob Brown -- Lake Street Capital Markets -- Analyst

Good afternoon.

Bob Vreeland -- Chief Financial Officer

Hi Rob.

Clay Corbus -- Senior Vice President, Strategic Development

Hey Rob.

Rob Brown -- Lake Street Capital Markets -- Analyst

Can you just comment a little bit on the demand environment with diesel prices up, assuming it's driving, but is there a tipping point here that you see or a price point, where you -- do you think demand can increase or what sort of the latest trends of demand environment?

Clay Corbus -- Senior Vice President, Strategic Development

Well, we are seeing demand pickup. I mean it's -- I don't know that there's any specific tipping point. But I think that people don't think that we're going to drop back down to '30s for oil per barrel, and that's really helping people sort of think, alright this is a great alternative to running on diesel, and so you know across the Board, we are seeing more demand. It's not flying off the shelves. But I think, steady Eddie for the refuse area, transit is continuing, and then I think the Zero Now in the heavy-duty trucks is --

Bob Vreeland -- Chief Financial Officer

That has certainly helped the interest in all of that, the higher diesel, higher prices is absolutely spurring even more interest. Just as back in 2014, when oil went way down, there was a little bit of a pullback. So we are certainly seeing the effects of the higher diesel.

Rob Brown -- Lake Street Capital Markets -- Analyst

Okay, thank you. And maybe on the SG&A run rate, is that kind of a sustainable level?

Bob Vreeland -- Chief Financial Officer

It is at a sustainable level. Yes.

Rob Brown -- Lake Street Capital Markets -- Analyst

Thank you. I'll turn over.

Clay Corbus -- Senior Vice President, Strategic Development

Okay.

Operator

(Operator Instruction). We have a question from Pavel Molchanov, Raymond James , please go ahead, sir.

Pavel Molchanov -- Raymond James -- Analyst

Thanks for taking the question guys. I know that in Q3, in California there was unusual spike in City Gate natural gas prices because of quirks in the local gas market, has that had any -- did that have any impact on Q3 results or for that matter, your business development efforts.

Bob Vreeland -- Chief Financial Officer

Pavel, yes, it had -- it certainly had some impact, but as you know we've got just a wide variety of supply points between CNG and LNG, and that's a little bit more CNG focus. So there were some impact, but not so meaningful that we had to call that out and that has subsided since then, so -- we view it as temporary.

Pavel Molchanov -- Raymond James -- Analyst

Okay. Transitory issue. And then maybe a little more kind of structural question. How many stations do you currently have nationwide. And I guess, thinking about CapEx, what would you expect that number to be a year from now .

Bob Vreeland -- Chief Financial Officer

Okay. Well approximately half -- the 530, some of those are customer-owned and some of those are ours. So approximately half of them, I'll say our stations, but -- and from a CapEx standpoint, we are in a good spot right now relative to what we can supply to our existing network. So this year we were looking at $15 million to $20 million of CapEx and a year from now that -- we won't be too far off of that number. It won't be in that neighborhood, but right now we're very strategically building when we have the demand and we need to put in our own infrastructure, some of that -- some of that CapEx is kind of maintenance CapEx, but not a real big number. So what we are putting in is very strategic toward volume growth and adding to -- adding to the network in that way.

Pavel Molchanov -- Raymond James -- Analyst

So, we won't be doing any spec stations?

Bob Vreeland -- Chief Financial Officer

No . So we're -- I think next year will be similar if not, maybe even a little bit more just because there is growing demand.

Pavel Molchanov -- Raymond James -- Analyst

Yeah, (inaudible) useful color. Thank you, guys.

Bob Vreeland -- Chief Financial Officer

Okay.

Operator

There are no further questions at this time. I'd like to turn the floor back over to Mr. Clay Corbus for closing comments.

Clay Corbus -- Senior Vice President, Strategic Development

Great. Thanks, Jerry and thanks everybody. We'd like to thank you for listening on the call today and look forward to having Andrew back with us and updating you on all of our progress next quarter.

Operator

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.

Duration: 27 minutes

Call participants:

Bob Vreeland -- Chief Financial Officer

Clay Corbus -- Senior Vice President, Strategic Development

Eric Stine -- Craig-Hallum -- Analyst

Rob Brown -- Lake Street Capital Markets -- Analyst

Pavel Molchanov -- Raymond James -- Analyst

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