Clean Energy Fuels Corp (CLNE) 2016 Q4 法說會逐字稿

Greetings, and welcome to the Clean Energy Fuels' fourth-quarter 2016 earnings call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn the conference over to Tony Kritzer, Director of Investor Relations. Thank you. Please begin.

Thank you, operator. Earlier this afternoon Clean Energy released financial results for the fourth quarter and full year ending December 31, 2016. If you did not receive the release it is available on the Investor Relation's section of the Company's website at www.CleanEnergyFuels.com, where the call is also being webcast. There will be 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 Factor section of the Clean Energy's Form 10-K filed March 7, 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 business operating results. Non-GAAP financial measures should be considered in addition to results prepared in accordance with GAAP and should not be considered as a substitute for or superior to GAAP results. The directly comparable GAAP information, reasons why management uses non-GAAP information, a definition of non-GAAP EPS and adjusted EBITDA and a reconciliation between these non-GAAP and GAAP figures is provided in the Company's press release, which has been furnished to the SEC on Form 8-K today.

Participating on today's call from the Company is President and Chief Executive Officer, Andrew Littlefair, and Chief Financial Officer, Bob Vreeland. With that, I'll turn the call over to Andrew.

Thank you, Tony. Good afternoon everyone, and thank you for joining us. I am pleased to review our fourth quarter and full year 2016 results.

For the fourth quarter the Company delivered 84 million gallons, a 7.4% increase over the fourth-quarter 2015. For the full year we delivered 329 million gallons, a 7% increase over the 308 million gallons we delivered in 2015.

Our fourth-quarter revenue was $102 million, and for the full-year 2016 revenue was $403 million, a 5% increase over 2015. Bob will be going into more detail in a moment, but it's important to note that we recorded a full year of VETC in the fourth quarter of 2015 but only one quarter of VETC in the fourth quarter of 2016.

We reported $18 million of adjusted EBITDA in the fourth quarter, our sixth consecutive quarter of positive adjusted EBITDA. For the year we reported $85 million of adjusted EBITDA compared to $27 million in 2015.

In the beginning of 2016 we stated that our main focus as a Company would be to grow our fuel sales, deleverage our balance sheet and conserve our cash. As we review the year I feel that we have accomplished those goals, but understand that there is more work to do.

Specifically, we reduced our outstanding convertible debt by $285 million in 2016, which provides $18 million of interest savings annually. We reduced our SG&A by 7% year over year while increasing our margin per gallon 25% over 2015.

For the year our CapEx was $23.6 million, which was more than a 50% reduction from 2015. For 2017 we anticipate our CapEx budget to be around $22 million, with an additional $7 million for potential growth projects at NG Advantage. At the end of the year we had $110 million of cash and short-term investments on our balance sheet.

2016 was one of our strongest customer focused construction years to date. For the year we completed 61 station projects and generated roughly $65 million in station construction revenue.

We grew our public station network, opening nine more truck stops including two stations on our Interstate 5 corridor, allowing fleet customers to operate along the entire West Coast from Seattle down to San Diego. We opened two stations in our Southeast corridor and two truck stops in Texas, as well as stations in North Platte, Nebraska, Salt Lake City and Oklahoma City where we anticipate supplying redeemed to over 100 FedEx freight trucks.

The refuse sector is one of our largest and most established markets, and it continues to grow at a healthy pace. 2016 was our strongest year yet.

We completed 32 new station projects and grew volumes to over 100 million gallons, a 15% increase over the prior year. We currently work with 152 different refuse customers fueling at 280 locations. This market has embraced natural gas fueling and invested over $1 billion in new natural gas trucks and fueling projects last year.

The transit market is another well-established and growing market. Municipal transit agencies continue to choose natural gas for their fleets of buses because of the ease, the superiority of the clean air impact and affordability. We added another nine transit customers last year, and we now fuel about 8,000 transit buses daily at 80 transit stations.

On the public policy front, we continue to be very engaged with local clean air initiatives. Here in Southern California the Port of Los Angeles and Long Beach are developing their Comprehensive Clean Air Action Plan to improve the air quality in one of the busiest ports systems in the country.

We hope to spearhead the initial 2008 Clean Truck Program in the Port, which helped to launch natural gas fueling in the heavy duty truck market. Now due to stricter air quality mandates and an aging truck fleet, the Ports are embarking on the next phase of the Clear Air Action Plan.

We anticipate that [the point] thousands of new trucks, powered by the zero NOx engines from Cummins Westport and fueled with low carbon renewable natural gas, will be an instrumental part of this ambitious plan. And we will keep you posted as this continues to develop.

Speaking of renewable natural gas, I assume everyone saw the announcement we made last week. But I feel it's important to highlight it again.

BP is acquiring the upstream portion of our renewable natural gas business, which includes our biomethane production plants and our third-party biomethane supply contracts. This is very significant for several reasons.

First, the $155 million of proceeds from the sale will allow us to address the majority of our outstanding convertible debt without dilution to our shareholders. Additionally, there is an earn-out of up to $25 million, and BP will be absorbing $10 million of debt from our renewable business.

This agreement allows both Companies to leverage their respective capabilities to further develop the renewable fuel market. And importantly, we feel this investment from BP is validation of Clean Energy's leadership in RNG fueling and the confidence they have that this business is well positioned for long-term growth.

Clean Energy will be taking the supply from these contracts and will continue to sell it as our Redeem branded renewable natural gas through our natural gas fueling infrastructure, and we will receive a revenue split on all of those gallons. So in essence the two Companies will focus on what each does best. BP will focus on the upstream business and we will continue to focus on the downstream business.

Since we first launched our Redeem renewable fuel business in our California stations over three years ago, we have seen phenomenal sales growth. In 2016 we sold approximately 60 million gallons to customers like UPS, Republic Services, Ryder, Kroger and multiple transit agencies, and we have expanded to multiple states.

We believe our Redeem fuel is the cleanest transportation commercially -- fuel commercially available for heavy-duty vehicles in the country today. BP recognizes the enormous potential of renewable natural gas, and we're thrilled that they want to collaborate with Clean Energy to grow this market. This is a good deal for BP, Clean Energy, our customers and our communities.

This morning the Federal Trade Commission granted early termination of the HSR waiting period, thereby eliminating the single largest condition to completing the deal. We fully expect to close in March -- we fully expect to close at the end of March.

We are proud of what we accomplished in 2016. We had our most profitable year and dramatically improved our balance sheet.

For 2017 our focus is on growth, profitability and the long-term opportunity in the marketplace. Growth and profitability are straightforward.

We want to add profitable volume to our existing recurring revenue base. In addition, and just as importantly, we will be working in 2017 to set ourselves up for long-term success.

We're confident that we're in a great position. The next generations of natural gas trucks have a superior emissions profile with new zero equivalent NOx engines that can run on a renewable biomethane, are far more cost effective than any other heavy-duty solution.

We have a developing market opportunity for significant deployment of these trucks in our backyard, which could be the catalyst for accelerated growth nationwide. Lastly, we have the largest nationwide network of fueling stations and infrastructure that can deliver this transformational solution to any fleet. With that, I'll turn the call over to Bob.

Thank you Andrew, and good afternoon to everyone. I will make my comments on the fourth quarter and year end, and then spend a moment discussing our BP deal relative to our financials.

For our 2016 fourth quarter, our volume and financial results continued on positive trends. Our volume growth of 7.4% in the fourth quarter versus a year ago resulted from growth in CNG gallons, offset partially by lower LNG and RNG gallons. For CNG we saw 11% volume growth led by our refuse and transit sectors.

The LNG gallon decline of 600,000 gallons was bulk supply related. Our RNG gallons declined as a result of selling more RNG Redeem gallons into our vehicle fueling network, and those Redeem gallons are included in our CNG and LNG gallons. Redeem volume for the quarter was 14.9 million gallons, and approximately 60 million gallons for the year.

Our revenue for the fourth quarter of 2016 was $101.8 million. In 2015 our revenue was $119.3 million. However, 2015 included a full year of VETC revenue in the amount of $31 million, whereas 2016 included one quarter of VETC revenue in the amount of $7 million.

Looking further at the components of our revenue for the fourth quarter, you will see that our volume related revenue of $73 million increased almost 13% from the fourth quarter of 2015. This increase was driven by volume growth including our Redeem fuel and related environmental credit revenue.

Our station construction revenue of $16.9 million was up $6.6 million, or 64% over 2015, as we had a large transit station build in 2016 that contributed to most of that increase. Our compression revenue was down by about $8 million from a year ago due to a softness in global demand for compressors. We continue to address the operating cost at our compression subsidiary in light of their lower revenues, with certain actions being taken in the fourth quarter of 2016.

For the year we saw revenue gains in our volume related revenue and station construction, with lower compression and VETC revenues. Keep in mind also that VETC expired at the end of 2016.

When comparing our gross profit margin for the fourth quarter of 2016 to 2015, this comparison is also impacted by the inclusion of a full year of VETC in the fourth quarter of 2015 versus only one quarter of VETC in 2016. Excluding VETC our gross profit margin improved in the fourth quarter and for the year ending 2016 versus 2015 due to a higher effective margin per gallon on higher volumes, as well as the benefit of increased construction sales offset partially by a decline in our compression profit margins on lower revenues.

Our effective margin per gallon was $0.34 per gallon in the fourth quarter of 2016 compared to $0.28 for the fourth quarter of 2015. For the year ended 2016 our effective margin was $0.35 per gallon compared to $0.28 per gallon for 2015. As we have discussed throughout 2016, our effective margin per gallon has improved as a result of our Redeem sales and the strong environmental credit market.

Our SG&A of $28.7 million in the fourth quarter was higher than more recent quarters and 7.9% higher than a year ago, as we took certain cost saving actions which are expected to result in lower costs in the future and we incurred some one-off in incremental costs that we don't see continuing in 2017. Collectively the cost saving actions and the incremental costs in the quarter amounted to approximately $3 million in SG&A expenses. On an annual basis our SG&A of $105.5 million was 7.2%, or $8.2 million less than in 2015.

We also recorded gains of $9 million from the retirement of convertible debt during the fourth quarter, bringing the total gains from our convertible debt retirements to $34.3 million for 2016, which has avoided debt principal that was due in 2018. Our GAAP net loss for the fourth quarter of 2016 was $3.9 million compared to a GAAP net loss of $50 million in 2015, keeping in mind 2016 had debt retirement gains and 2015 had a full year of VETC revenue and a non-cash interest charge of $54.9 million. For the year ending 2016 our GAAP net loss was $12.2 million compared to a GAAP net loss of $134.2 million for 2015.

Our adjusted EBITDA for the fourth quarter of 2016 was $17.9 million compared to $32.9 million in 2015. And for the year ended 2016 our adjusted EBITDA was $85.3 million compared to $27.8 million in 2015. All told, after considering those items impacting comparability, our financial results improved in the fourth quarter and for the year ending 2016 compared to 2015.

From a balance sheet standpoint we've reduced our total debt balances from $572 million at the beginning of 2016 to $314 million at year end. And we reduced our convertible debt by another $25 million in February 2017. Our cash flow from operations of $48 million for 2016 was an improvement of $58 million over 2015, and we remain in a good liquidity position as we move into 2017.

Regarding our announcement on the sale of our upstream portion of our biomethane business, assuming this closes by the end of March, this will have an impact to our financial results looking forward. And while we don't give specific guidance on future results, we do want to give some range of financial impacts from this sale.

Our estimates of the financial impacts are based on information we have today and are subject to possible volatility in volumes and the environmental credit market, so we can give no assurances on what will happen with the volumes or prices of the environmental credits going forward. Given the information we know today, we expect to see a reduction in our effective gross margin per gallon as a result of no longer owning our biomethane plants and from receiving a smaller portion of the environmental credit revenue associated with our BP-supplied biomethane.

As such, we estimate our effective gross margin per gallon will be in the range of $0.25 to $0.29 per gallon on a go-forward basis, whereas during 2016 our effective gross margin per gallon ranged from $0.33 to $0.36 per gallon. Keep in mind these effective gross margin per gallon figures are applied against our total volumes when calculating the financial impact.

Revenues and cost of sales will be impacted, but the net result will be an anticipated lower effective gross margin per gallon. There also will be some reduction in SG&A, although not an overly large reduction, estimated at around $2 million in annual savings because we will continue to be in the downstream business of selling and marketing Redeem. In fact over time we could see those Redeem SG&A resources grow as demand continues to grow.

All in all, given the parameters I just laid out on our effective gross margin per gallon and SG&A, you can model out the impact on EBITDA, keeping in mind our results for 2016, the total RIN and LCFS revenues of $49 million recorded in 2016, and how all this might translate into a reasonable multiple of EBITDA that BP is acquiring for $165 million, including the debt assumption but before the $25 million earn-out. While there will be a near-term impact on EBITDA, we believe we are monetizing a future earnings stream in is a very favorable renewable fuel market. Going forward, we believe we have tremendous opportunity with our partnership with BP to further grow our renewable natural gas Redeem volumes.

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

(Operator Instructions)

Eric Stine, Craig-Hallum.

Hi, everyone. Nice quarter.

Thanks, Eric.

I know obviously just announced last week and very early, but curious what the market response has been to the BP announcement, since I know that one of the issues is has just been lack of supply and that's limited some growth. So any color on feedback from fleets? Then longer term, of as you think about BP's plan, is there a reason why this can't be a couple hundred million gallons a year or more as we look a few years out?

Eric, I think it can be that size of a couple hundred million gallons or more a few years out. The reaction we've had is positive.

Obviously because of the announced we've been talking to our customers and those that we work very closely with in the refuse business, and the reaction has been positive that our partner in the upstream part of this will be BP. And it's actually engendered a lot of interest by customers in other parts of the country.

We have been a little bit more -- well, a lot more advanced on getting Redeem in the California market and the Western states. As you know, we have grown it some into Texas, but we saw because of the announcement this week we've had interest in other markets in Texas and actually on the East Coast.

So our job, as I said last week, is to continue to grow this business. It's a great product that our customers seem to like.

It's a very clean product and it's one that we can deliver, really differentiating ourself from our competitors because we have this capability, we have the relationship now with a really large supply with BP, and we have large network to be able to push it out to our customers. I think the size that you've mentioned is very realistic, and I think over time BP, I don't want to speak for them, but they think the biomethane business can be very large.

Right. And pricing-wise, really, it's little or no incremental cost to the customer. You would think that this is a no-brainer and should be good for volumes obviously. Okay, Then maybe just --

That's right.

Okay. Maybe just turning quick to the ports and the clean trucks program, you touched on it briefly. Maybe just next steps that we should look for as part of the process. Then just curious, I have been following it and I know that any number of different technologies are under consideration, so it maybe just some of the inroads and progress that natural gas trucks specifically are making versus some of the other technologies.

Good. Thank you, Eric. On the ports specifically, the Clean Air Action Plan 2, if you will, is moving forward. The Port of LA and the Port of Long Beach have taken stock of the initial public comment period, and they think they need a little bit more time. We will see this, the formulation of this plan, probably take at least another 90 days, would be my guess, and of course who knows how that will work out. It's complicated.

The Clean Air Action Plan is broader than just trucks. Obviously that's what we're focused, but it takes into consideration other land-use operations and marine uses. I like the way it's going.

We are beginning to crystallize the decision that's before the ports is this. There are many that would love to see electric equipment and trucks at the port, and that's fine. Those trucks aren't available today, and so really when you get right down to that, what does that mean?

Well, that means that you adopt -- you could adopt a plan that would allow for diesel trucks to continue for maybe as many as five or 10 more years. In fact, the draft plan, Eric, you may remember said, let's adopt the plan. One idea is, let's adopt a plan allowing for diesel trucks, current model diesel trucks, and every five years or so look to see how the electric truck business is going. And then maybe in 10 years or so that we would then begin to put electric trucks into the port.

Well, what that really means is that you have no cleaner trucks, no cleaner air in the port for the next decade at least. As people -- this has been able to kind of soak in, people have understood that there is a better way, there's a better answer, and that is you bring the natural gas trucks into the port, the new low NOx 12-liter trucks into the port, which have a 90% reduction on NOx. That's the big problem in Southern California area.

By the way, you use renewable fuel and you get 70% less methane, and you do that probably a third of the price of the electric option. You don't have to turn over your fleet two more times with diesel and then go to electric. So it's much more affordable, requires less incentive funding.

That's beginning to become clear. So there's more work to be done, but we have an answer. We've positioned ourselves well.

There is a consortium of companies in this business that are pushing. It's called the Clean Air Act Now, it's probably on a website that you can look at, but it's a very viable solution. So we like the way that that's going into the port. We think we are well poised.

Interestingly, on this second piece of your question, there is a lot going on here and if you are not here it is hard to follow, but we have this group here in Southern California that is responsible for the air quality in the four major metropolitan counties that makes up Los Angeles and it's what,18 million to 20 million people. It's called the South Coast Air Quality Management District. They have just Friday were passing their Air Quality Management Plan.

This is something that I don't think most people have focused on, but we have, and that plan calls for 270,000 near zero heavy-duty trucks to be placed in Southern California roads by the year 2023. Specifically on votes on Friday, the Board directed the staff to prioritize incentive funding toward cost effective heavy duty truck strategies, such as current and emerging near zero emission natural gas technology. So that's what we've been talking about, that's the 12-liter.

Secondly, the Board directed the staff to update the South Coast fleet rules. The fleet rules, that is the buzzword maybe for you listening, but the fleet rules were rules they put in place a decade ago that required trash trucks, required transit buses, and that's why 90% of all the trash trucks in the LA Basin are natural gas and it's the reason why all the transit buses are natural gas. They asked the staff to update the South Coast fleet rules to take advantage of zero and near zero emission strategies.

That's our natural gas trucks with renewable fuel and the low NOx engine. Look, those are big deals and they slipped into the dead of night here, but it's something that's now in the Air Quality Management Plan and it's something that we think we can answer. I hope -- that's a lot, but I hope that's gives you the flavor of what's going on here.

Thanks for all the details.

That's why in my remarks, and I think we're well poised of the near term growth opportunities and we've got the product, we've got the fuel, we've got the renewable fuel and we've got the engines. Really no other -- when you asked about other technologies, nobody else is ready to go like that.

Got it. Thank you.

You bet.

Rob Brown, Lake Street Capital Markets.

Good afternoon. You mentioned in your CapEx numbers some additional spending for NG Advantage. Could you give us some color on what would drive that? Is that additional customers signing up in general?

It is, and you notice I used the term potential. We think we've got a couple of big deals that would have contracts with large customers and other opportunities up in -- these would be in the Northeast that we think would be significant. And so we've put it into our budget.

That'll only happened, though, if you have a customer contract. So I am hopeful we do.

But if you think about it as a like for like, that's why I mentioned -- I broke it down for $22 million in terms of our station building program and, frankly, maintenance CapEx. Our maintenance CapEx runs at about $5 million or $6 million.

You have gone from years when you were spending $100 million, $87 million on station building to now where it's apples to apples. Our budget in 2017 is something closer to, really, $16 million in terms of station build.

So we have spent, as we said before on these calls, we have spent a significant amount of money to build out the network, and it's really built. From here it's really doing our best to load and leverage that network.

Okay, thank you. Then Bob, you talked about margin per gallon in Q4. Did that include the VETC or was that without the VETC, like-for-like basis? I think you said $0.34.

Our margin per gallon does not include VETC, but both periods did include the environmental credits, the RINs and LCFS. The VETC is not in that margin per gallon.

Good. All right. Thank you very much.

Pavel Molchanov, Raymond James.

Thanks for taking the question. First, just a small housekeeping item on the income statement. You talked about the EBITDA impact of the BP sale. What about depreciation?

So it's $14.6 million this past quarter. Will that declined commensurately with revenue?

Well, there will be, I will say, a smaller impact on the depreciation. So commensurate with revenue, yes, probably just about.

Okay. Just to clarify, given that you're going to be essentially operating these assets on behalf of BP, will the underlying RNG be a pass-through source of revenue for you, or is that going to show up on exclusively on BP's own income statement?

For us it will be more of a service contract. Generally speaking on service contracts that we are supplying and servicing gallons, we may record those gallons but it's really going to be a more of a service fee for us. So not a sale of fuel.

Got it. Is that going to show up as service revenue on the income statement?

Yes.

Okay.

It would be in that category, yes.

Got it, understood. Appreciate it.

Thank you. We have reached the end of our Q&A session. I would now like to return the call to management for closing remarks.

Thank you, operator. Thank you everyone for joining us this afternoon. We look forward to updating you all on our progress in the next quarter. Good day.

Thank you. This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.