Q3 2019 Earnings Call
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Now I'll turn the conference over to your host Robert Freeland, Chief Financial Officer. Please go ahead.
Thank you operator earlier this morning clean energy released financial results for the third quarter ending September 32019.
If you did not received the release it is available on the Investor Relations section of the company's website at Www Dot clean energy fuels Dot 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 assumptions that are difficult to predict words of expression, reflecting optimism satisfaction with curb prospects as well as words, such as believe intend expect plan should.
Anticipate had similar variations identify forward looking statements, but they're absence does not mean that the statement is not forward looking.
Such forward looking statements or 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 arkon tribute to such differences are described in detail in the risk factor section of clean Energys Form 10-Q filed today.
These forward looking statements speak only as the data. 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 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 gap 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 Companys press release, which has been furnished to the FCC on form 8-K today.
With that I will turn the call over our President and Chief Executive Officer, Andrew Littlefair. Thank you Bob Good morning, everyone and thank you for joining us.
The adoption of natural gas as a clean transportation fuel continued into the third quarter. This year, our volume grew a healthy 11% year over year to 102.7 million gallons for the quarter, the first quarter and the company's history that we provided over 100 million gallons natural gas to our customers around the U.S. in Canada.
We saw increases on the core markets of refuse and transit as well as a very healthy bump in the trucking sector.
Driven by the redeem renewable natural gas fueling deal we signed would you be asked earlier this year.
Our financial operating performance continued to improve in the third quarter as we were we're delivering more gallons at less cost.
Revenues of $74.4 million were slightly down from the same quarter of 2018, primarily due to lower revenues from our station construction business, which is very seasonal.
Our third quarter, adjusted EBITDA was up to $8.5 million with close to $100 million in cash we believe our overall financial position is strong and it continues to improve.
I mentioned much of our growth continues to be driven by the demand for a renewable natural gas product redeemed in.
In addition to the U.P.S. agreement to purchase the equivalent of 170 million gallons redeem over a seven year period for their stations across the country. We've added additional customers seeking the superior performance in environmental qualities of a renewable non fossil fuel at a competitive price.
The city of Ontario, California signed a five year redeem supply contract for approximately 3 million gallons to help meet their sustainability goals, Ontario operates a fleet of 88 CNG vehicles, including their first powered asphalt that struck.
One of the largest streets, we think companies in the country nationwide Environmental services based Norwalk, California signed a five year redeem supply contract for approximately 1 million gallons for 70 Street sweepers.
The cities are Redondo Beach in Sacramento, California, also signed contracts to feel their fleets with an anticipated 1.2 million gallons redeem between the two.
We also recently, Inc. The tenure agreement to fuel GFL environmental split a 50 CNG refuse trucks in Denver that numbers, it's expected to grow to 70 by the end of next year is the company's commitment to sustainability continues.
Through and cries transportation, a national trucking from signed a three year contracts were 450000 gallons of redeem to operate 20, new CNG heavy duty trucks.
On Retrans, which provides bus and rail service and San Bernardino, California signed a five your own M. agreement for their two stations that will now be dispensing and expect to 4 million gallons of redeem every year.
We sold 110 million gallons of redeem and 2018 and expect that the number to grow approximately 30% in 2019.
We have been able to do so because of the agreement that we signed late last year with BP one of the world's largest energy companies. This co marketing agreement with BP has enabled us to access bps extended network of Orangey producers is more and more fleets are asking for the fueled the produces at least 70 per se.
Unless carbon than diesel.
Clean energy has the largest natural gas fueling infrastructure in the country. Unfortunately has an important relationship with north North Americas largest supplier of orangeade.
I'd like to give you an update on the effort to sign heavy duty.
Truck fleets Oh, you saw our press release, a few weeks ago announcing that over 100, new natural gas trucks have been delivered to firms that operate out of the ports of Los Angeles and long Beach.
As we've discussed in the past the ports are in the process of implementing a new clean air program that calls for doing away with old Dirty diesel trucks and operate there.
The deliver as these new hundred trucks is significant because it is an affirmation by these firms that natural gas is the best alternative to meet the more restrictive emission standards, while maintaining the high performance of that they need.
Most of the firm's participated in a pilot program late last year in early this year testing the new Cummins Westport 12 liter near zero engines. After a successful year of testing the trucks. They have now begun to add new trucks to their fleets. I think this is a strong sign for the new 12 liter engine.
And.
In the confidence of natural gas as a fuel.
Policymakers in California continued to understand the natural gas is a good solution to address the state's ongoing emission problem.
Last week, the South Coast Air quality Management District proposed the bill to impose absent sales tax to help fund cleaner burning heavy duty trucks. They noted that if the bill passes that most of the money should go to what they referred to as near zero trucks and natural gas fits that definition.
The UQM de realizes that the results of getting more natural gas trucks on the road now would have a greater and more immediate impact on air quality and reducing nox versus waiting for other technologies like electric to advance to commercialization.
We also continue to have success with our zero now program, which helps fleets get into new natural gas trucks for the same prices diesel trucks, while saving on the price of the fuel.
We just struck a deal with one of the largest trucking companies in the country and I look forward to sharing more details when I'm able to in the near future.
The companies in the process of ordering 200, new heavy duty trucks equipped with new Cummins Westport 12 liter natural gas engines.
The 200 truck orders in addition to 20 other natural gas trucks at the company ordered earlier this year, which are being which are being getting to be delivered now demonstrating their commitment to natural gas.
In addition to this large single order are zero now program has recently shown other results.
Algae Autoparts ordered 46 trucks that will be fueling at Irvine, California station.
Trademark transport, which has a carry that operates out of the port a long Beach is now order 20 trucks through the zero now program. He distributors a leading carrier in the food industry is just signed a zero now deal and will be purchasing their first natural gas trucks, which will fuel at our existing.
Fontana, California station.
I would also like to highlight something that I'm sure. Most of you saw last month.
Yes, as announcement that it would be spending $450 million over the next few years on thousands of additional heavy duty natural gas trucks and infrastructure is very significant on many levels.
In their own words, EWP, yes, one of the world's largest leading logistics companies states that the use of CNG as quote.
No longer in the test or experimental phase, but rather in the means mainstream.
This means there so pleased with the performance and cost of operating their current large CNG fleet that they have decided to significantly expand it.
They also pointed out that the price stability of CNG versus diesel plays a large role and why they continue to purchase CNG trucks company said that this Big addition to their CNG trucks fleet can be easily deployed across the us in Canada and while the U.P.S. announcement. It was not part of our zero now program, we will be provide.
During much of the fuel.
As I pointed out in the past other alternatives in the heavy duty truck market are currently getting the lions share of the media attention, particularly electric but non can come close to me in the claims you PS made about their very large expansion of their CNG fleet.
Natural gas as the only fuel choice today that can meet stricter emission standards help to address long term climate change issues with R&D cost less than the income and diesel and most importantly provides demanding fleet operators the performance there used to.
We believe the momentum towards natural gas in the heavy duty truck market is on the verge of really accelerating not only are we seeing it in response to our zero now offering but another example took place last week in Indianapolis, where comments hosted a natural gas engine technology for 200 people representing over 50 fleets attended on their own die.
Im to learn about operating natural gas heavy duty truck fleet.
Cummins, we're so pleased with the turn out in the reception of this first time event that they have already scheduled a similar gathering early next year that will target the shipper community as well as public policy makers.
The third quarter over this year proved to be a good one with solid volume growth driven by all markets.
We are we also continued to effectively manage our balance sheet by keeping our spending and capital expenditures at levels that allow us to continue selling more and more fuel but are also in line with our goal to reach net income profitability.
And with that I will hand, the call over to Bob.
Thank you Andrew.
It wasn't another good quarter with improvements in our operating margins and that results on a year over year basis. Due to continued volume growth on lower spending which has also allowed us to keep a good cash position.
And we remain on track to achieve low double digit volume growth for the full year 2019.
I'll also point out our results improved despite low RIN prices throughout the third quarter.
On our last earnings call I noted there was a significant decline and RIN prices that began in June which did not materially impact our second quarter results, but without any meaningful recovery in RIN prices during the third quarter, our product gross margins were lower by approximately $2 million.
On the other hand, LCFS prices have remained at higher prices and thus far in 2019, and we expect that to be the case going into the foreseeable future and higher LCFS pricing is also beneficial to our BP earn out that has determined at year end.
While we believe RIN prices will increase in due course, it's likely RIN prices will remain low in the near term, which will negatively affect our fourth quarter operating results.
Buying them out similar to the third quarter.
What helped to offset the impact of the lower rent pricing is our volume growth.
Our volume growth of 11% in the third quarter compared to last year came principally from CNG, while LNG volumes were slightly less than a year ago.
We continue to benefit from our growth in the delivery of redeem even in a low RIN price market.
Particularly under our new U.P.S. contract as well as many other customers that are creating incremental demand for our renewable transportation fuel.
Deemed volume grew 32% and in the third quarter to 37.4 million gallons versus 28.3 million gallons a year ago.
Our revenue for the second quarter of 2019 of 74.4 million included a $1.1 million noncash gain on or zero now fuel hedge last year's second quarter revenue was 77.3 million, which included 9.4 million in station construction revenues versus six point.
4 million of station construction revenues in 2019, which wasn't aligned with our expectations.
Our volume related revenue exclusive of the fuel hedge gain was essentially flat year over year.
Incremental revenue from our volume growth was offset by a lower effective price per gallon due to falling natural gas prices the decline in RIN prices and changes in the mix of fuel sales due to the various fuel type sold and geographies in which we sell fuel.
Our effective price per gallon.
In the third quarter of 2019 for all volumes delivered was 65 cents per gallon compared to an effective price of 73 cents per gallon delivered in the third quarter of 2018.
Which has a nearly $8 million negative effect on revenue year over year.
But as I pointed out in the past to the extent our revenue was lowered by the effect of lower natural gas prices. We also see a benefit and lower commodity cost of goods sold and thus we do not experienced equal effect on our margin per gallon from a drop in our effective sales price per gallon.
Given our view on RIN pricing remaining low in the near term, we see an effective price per gallon on all volumes delivered for the fourth quarter to be in the range of 60 to 65 cents per gallon assuming no other major price moves in the rent and LCFS credits.
Given these circumstances total revenues for the fourth quarter of 2019, including construction sales should be in the low to mid $70 million range.
Our overall gross profit margin in the third quarter of 2019 was $24.5 million, which benefited from the $1.1 million noncash zero now fuel hedge gain.
Gross margin in the third quarter of 2018 was 24.5 million.
Our effective margin per gallon was 22 cents for the third quarter of 2019 compared to last year at 26 cents per gallon.
The lower RIN prices made up two cents per gallon of the difference in our year over year margin per gallon.
As as I said, our volume growth is helping to offset the effects of the law RIN prices and thus our overall gross margin dollars remained consistent year over year, despite the lower RIN prices.
Given our current expectations on RIN pricing remained low in the near term will in 2019 with an effective gross profit margin around 24 cents per gallon for the full year.
Which is within our expected range.
Our asked DNA and the third quarter of 2019 was 17.6 million versus 18.4 million a year ago.
We continue to trend toward the bottom of our range of 73 to 79 million for the year.
Our GAAP net loss for the third quarter of 2019 was 4.3 million compared to a GAAP net loss of 10.9 million a year ago.
This improvement in our net results was driven principally by better operating margins and lower interest expense.
Our interest expense declined by 2.4 million for the third quarter compared to a year ago, bringing the year to date decline in interest expense to 7.7 million compared to last year.
Our adjusted net loss for the third quarter of 2019 was 5 million compared to an adjusted net loss of 9.2 million in 2018, and our adjusted EBITDA for the third quarter of 2019 was 8.5 million compared to $7.3 million in 2000 in Asia.
Team.
We ended the quarter of 2000, the third quarter with 99 million in cash and investments and data Beatty Threemillion.
And we're still anticipating increases in both capital expenditures and debt in the near term to support our volume growth initiatives.
And with that operator, we'll now open the call two questions.
Thank you at this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
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One moment, please while they pull for questions.
The first question is from Eric Stine of Craig Hallum. Please go ahead.
Hi, Good morning, it's Aaron Spychalla on for Eric Thanks for taking the questions.
Hello, Eric.
Maybe first for US you gave some good detailed Andrew on kind of testing and some of the funding in the ports can you just maybe give us a little more detail there and maybe size the opportunity for us over the next couple of years as we hit critical mass there right.
As I've discussed before the Port has Oh gosh, it's somewhere between 12000 15000 trucks.
And this cleaner action plan is.
Beginning to get phased in.
They're going through the sort of the final throws of the policy to decide what the container fee will be which goes into effect next year.
And they're doing those studies now they've done some feasibility studies in terms of natural gas and electric.
And as you could imagine both natural gas and electric have kind of qualified.
They are trying to determine right now they're working at both ports are working with staff to try to figure out just what is the container fee. This would be a fee.
If you continue to operate a diesel truck.
Rather than a natural gas or an electric truck that would be assessed on each.
Of container.
And.
It can range anywhere from a.
$30 $35 per container most trucks hall to containers. So it's $70 a move it's important to note that these that this fee is often.
Is.
Is.
Walmart for instance, picking on them they don't want to pay that fee. They what they assumed the truckers going to take care that so we saw 10 years ago in the first rendition of this.
Clean Air action plan that.
The older and that time much older a diesel fleet was replaced.
The fee.
Necessitated that these these truckers really had to get rid of the dirty diesel trucks in either add and that in those days natural gas.
Or a newer diesel and at that time about 1500 natural gas trucks. This is almost 10 or 11 years ago came into the into the port.
As did about Oh, gosh, eight 2000, 10000, new new diesel trucks.
And so we think that there will be a fee that will be in that range. There's a lot of fighting over it depending on.
Those that don't want to.
Fee and those that don't want to high fee and we would rather have lower fee.
And making sure that the port doesn't the position itself in terms of commerce.
But I.
We expect that in the latter part of this year that that fee will be.
Become public it will be discussed more and will be phased in next year.
So I think you should expect over the next couple of years.
That.
The Lions share of the fleet in the Port will either moved to natural gas or electric.
And those are really the two options before them and so.
So.
How that exactly phases, and im not sure I imagine that in 2021.
The summer, you'll see that all be kind of in effect.
Our took two I'm sorry, 2020, that's next year by the summer it'll be in effect.
Imagine you'll see a few thousand trucks begin to change and then the more in 2021 and finish out and.
Latter summer of 2022, so I think.
10 to 12000 trucks will change and I happened to be optimistic that natural gas will get a.
Since its really the only game in town so far the only.
The only.
Engines that are proven and our economic I think you'll get the lion share. So we're very optimistic as you know we have fueling stations there I feel good that even before these regulations have gone into effect. We've can we completed the successful test of 20 units earlier this year as I mentioned in my remarks now people are taking.
Now that participated in that test believed in it that went so well that are beginning to buy trucks.
We've seen about 300.
Trucks or could be a little more than that have.
Put in for grant funding for more natural gas trucks. So I like the fact that we're going to have a lot of experienced by the latter part of this year early next year, four or 500 trucks already operating in natural gas and I think that really sets the stage well as we begin to compete against.
Electric or what have you as the poor begins to change.
Good good thanks for the color there will stay tuned second for me can you just kind of talk about.
As we start to see more kind of clean fuel programs in L. CFS programs outside of California can you just can't talk about the outlook to expand redeem into other markets well you know we're in other markets and.
Look here to Bob Defino is off to have it head on oil.
I think going on right I think we're actually moving redeem right now into 20 states, yes, and so we have moved it now look we're a little constrain still by supply there's a lot of supply coming on now. This this lowering of the RIN price hasn't helped some of the new.
Projects that we've seen but there you know as I believe that the industry had thought that there was about 2 billion dollars' worth of.
Renewable natural gas projects across the country that we're kind of getting ready to start this RIN pricing coming down from gosh in the high mid one dollar.
Dollar 50 to down to 70 cents is made some of those go on hold we think that those RIN prices, which has had an impact on us a little bit.
But not devastating but it has made an impact will as the RV show the renewable fuel standard volume commitments come into get finally set and maybe some adjustments we made we think that the the.
RIN pricing will move up again and a lot of these projects will kind of go from Oh, yellow light and begin but there's there's a lot of projects around the country and so there's more supply coming.
And importantly, there's this we're starting to see the first there's a lot of talk about it dairy farms everybody's talking about.
Renewable natural gas coming from dairy farms, and that's really important because it's so powerful because it's so clean that so low on carbon.
Today, we're at 70% less carbon gosh, when you when you get to using dairy fuel dairy farm fuel gosh, it's like 200%, 250% less.
So it's very very powerful.
We're just seeing those dairy projects coming online and it's really going to be the future. It's very exciting because it really makes our fuel very clean I mean dramatically cleaner than electric when you couple that with low knocks on the 12 liter engine, which is 90% less Nox and then you put it with dairy fuel.
Renewable fuels not fossil I mean, its strong and so we're seeing a lot of that.
Eventually you will have another couple billion gallons of RMG move into the market and then the 20 states will grow I mean, we're already moving.
Our LNG to Republic, and lots of different parts of the country Republic industries, the number to refuse company in the United States into and in many states.
So we think it's the future we're well positioned to audit it gives natural gas a leg up because it makes it a renewable fuel and you can blended or use it all together you know all of our stations in California are using renewable natural gas.
Right right. Okay. Good thanks for the color and I'll hop back into queue. Congrats okay. Thanks.
The next question is from Rob Brown of Lake Street Capital markets. Please go ahead.
Good morning, good morning, Rob.
How do you redeem ramp with you or.
Once again, where that Ted how much further together.
Well it started up pretty strong and.
I think we are at 18 million gallons are so for this year or run rate, but then it picks up from there.
Alright.
Yes, yes, so it was.
We started yeah the ramp the ramp in this.
Quarter was close to a full ramp yep yep.
That kind of started.
In I believe it was April yes, and so this third quarter.
We are.
We're kind of.
Fully there little bit ebb and flow, but frankly I'd slowing.
Okay great.
And then zero now program you listed a number of trucks with or 300 that are sort of being ordered what's the what's the latest in getting those orders in place and heading into 2020 well.
Those orders I mean, you knock on wood unless some ABS are those orders are in America going in right now so.
I think you can put those in the bank.
So we're seeing a pickup so those are in addition, those are new since we've talked about it.
We haven't announced those will give more color you know some of our fleets don't allow don't like us to announce these things until they are good and ready and I understand that they see as a competitive advantage, but we're beginning to see pickup I would say that you know what's important and the way I look. This is this the whole zero now took a little bit longer than than I would have.
Why there was a little bit more education.
When we kind of rolled back a couple of years ago. When we had the decline in oil price people stop looking and natural gas for a little while because the economics got a little bit more challenging.
We added then come back and make sure. They understood now this new engine.
This new engine is performed really well.
It's a lower Nox and we had some work to do to make sure I understood that it was the second generation engine and that it had.
The.
Increase testing of that it was very reliable and we feel good about that.
Rob what I think it's important for people on the call to understand as you know we kind of went from a period of.
Getting people to try five trucks now this 200 truck order, that's a big order and.
Okay.
As I mentioned in my remarks, the the U.P.S. announcement didnt participate in our financing.
Of the zero now, but we are core selling them awful lot of their fuel.
Look that significant I don't know that we know the exact number of heavy duty versus some of the package delivery in that press releases, they made but I'm thinking it's very close to something over the next few years of 5000 trucks.
I mean, so what we saw in the Refu sector is this very phenomenon, where we go from a testing cycle too it's something that's more like an or purchase cycle and then you know you begin to get into a.
Period, like we have now with waste management, where 90% of their annual purchases.
Our natural gas and.
I don't know exactly where we'll be because I'm not an expert on that is not for me to to know exactly but you know you PS is approaching somewhere in there kind of more normal purchase cycles year over year buying natural gas and so we've left the test phase and it's it's as they said is.
Is more than the mainstream now and.
This this announcement that I made this morning of the 200.
That fleet buys more than 200, but thats a large purchase geared you're looking at.
200 times $150000 right on those trucks, so it's a large purchase for them.
And.
That I take is a very good sign.
We are seeing Twentys and 46.
And this 200, we're beginning to.
Fleets are beginning to gain confidence and that's new that's new.
With this new engine here this year.
I think the zero now is helping that by the way.
Okay, Okay great.
Great and then and then how do you see volume growth shaping up into 2020, I think you said.
Double digit this year.
How is next you kind of looking well I'm not going to say that right now, Rob, but I would like to think that the benefit that we're seeing now from zero now would grow in 2020, I mean, we we'd like to think that this market is often running.
And so I would hope that we're going to see an improvement next year, where on the trucking side I mean that lot of our business is growing well right, our our refuse and our transit there's there's sort of limitations in that business, but it has been growing at a bit about the double digits.
Trucking hasn't ability if we get the acceptance in the adoption like we would hope when we think we're seeing it can come up way above that and.
And get into more significant volume growth and that's what we're hoping for and we.
At some point.
The next quarter, So we'll give some a little bit more color about what we see.
I would think though it should be stronger unless something happens the economy or something else it should be stronger than it is this year.
Okay, great. Thank you I'll turn it over okay.
The next question is from Pavel Molchanov, Raymond James Raymond James Pardon Me. Please go ahead.
Hey, guys. Good morning. This is mohamad glom on behalf of all more Tom Thanks for taking the questions Hi mob.
So let me start asking if the medic question about Canada now that Trudeau has an reelected we now that the carbon tax refund remain in place I'm curious in that context do you guys see any upside for demand from the Canadian market.
We do we finished a few stations up there on that important.
Core door that one of those stations outside Ontario is loading now.
I have a couple of programs that are beginning to be put in place that are grant programs that I think could do.
Move to Sims moves significant volume.
And so we were feel good about Canada, Canada took a early lead in the natural gas vehicle program years ago, and then it kind of went into about a 10 year sort of hiatus and its back and.
Weve added some stations along that core door.
And so yeah, we're feeling pretty good about what's going on in Canada.
Okay, a similar question about Oregon, and their low carbon fuel standard obviously much linear program in California, I'm curious are you seeing demand based on that.
You know, it's it's starting and its smaller we are selling some fuel up there.
I don't know off the top of my head exactly what percentage of it is but.
It's small I think Washington's coming on board as well so.
There's been talk about.
This in New York State I don't know exactly where that stands right now.
We're a little limited on some.
R&D supply right now in a lot of an wants to find its way to California because of the advantageous so low carbon fuel standard.
You know the low carbon fuel standard worked and it's created a lot of supply Thats look that's moving to do right now to California, but I think these other states as you mentioned, Oregon and others will.
The states not as big and the fleets are theres not as much up there but.
That it has a way of stimulating the growth of RG.
No doubt.
Okay. That's all from me thank you.
Your mom.
We have reached the end of the question answer session and I will now turn the call back over to Mr., Littlefair, President and Chief Executive Officer for closing remarks. Thank you operator will we want to thank everyone for listening in of the call. This morning, and look forward to updating you on our progress next quarter.
Have a good day.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
Yeah.