Q3 2021 Clean Energy Fuels Corp Earnings Call
[music].
Okay.
Good afternoon, and welcome to the clean energy third quarter 2021 earnings Conference call all participants will be in listen only mode.
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I'd now like to turn the call for silver to Robert's Relent CFO. Please go ahead.
Thank you operator earlier this afternoon clean energy released financial results for the third quarter ending September 32021, if.
If you did not receive the release it is available on the Investor Relations section of the company's website at Www Dot clean energy fuels Dot com for 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 or expressions, 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 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 those 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 Little Fair. Thank you Bob Good afternoon, everyone and thank you for joining us the country continued to climb out of the pandemic induced economic slowdown this last quarter, which helped the ongoing recovery of the transportation sector and our fuel volumes.
We also added new customers to our roster of those fueling.
With our ultra clean renewable natural gas or RMG, and we made significant advancements in securing future supplies of RMG all in all a very good quarter.
Our fuel volumes exceeded 100 million gallons for a second straight quarter coming in at over 104 million gallons, an increase of about 7% from the third quarter of last year.
Our revenue was up very healthy, 21% to $86 million for the third quarter, even after the noncash charge for the Amazon warrants.
Without that charge revenue would have been $88 million or 24% increase over the third quarter of last year.
Our R&D volumes of 42 million gallons grew 5% from a year ago, demonstrating the increasing demand for the negative carbon intensity fuel and clean energy's ability to deliver to deliver large volumes of R&D.
Adjusted EBITDA for the quarter was $13 4 million or 22% increase over the same quarter a year ago.
We ended the quarter with $260 million in cash and investments, leaving us in a strong financial position as we continue to invest in future RMG supply.
And further expand our fueling infrastructure for our large new customer Amazon and other fleets.
We communicated to you earlier in the year that we pivoted our business to focus on the expansion of our R&D offering and to begin to control more of our own destiny by investing in the production of new RMG supply.
All fleets are looking to Decarbonize, which is why a fuel that can be rated negative carbon intensity. So appealing.
Fleets, including some of our longtime customers like the transit agencies in L. A Dallas and New York easily and quickly switched to R&D because their buses were already equipped with natural gas engines and the existing fueling infrastructure could be immediately.
Could immediately deliver organic renewable fuel.
Other customers like Amazon or deploying their first alternative fleets and they are choosing RMG the risk for them is negligible because of the heavy duty trucks are equipped with a proven Cummins engine and immediately have access to a nation national existing fueling infrastructure.
Amazon began rolling out their fleet of heavy duty LNG trucks less than a year ago and Amazon trucks have already fueled at over 85 clean energy network stations in 21 states around the country.
That number does not include the additional stations, we announced we would be building to accommodate the deployment of the Amazon fleet as the new anchor customer.
We expect those new stations to begin begin coming online starting in early 2022 as Amazon continues to expand its fleet.
R&D as a drop in fuel and can be directed to any of our stations for any customer that is contracted for the ultra clean fuel.
Speaking of Cummins engines I Hope you saw the very important announcement that was made last month about a new 15 liter natural gas engines for heavy duty trucks.
As the President of Cummins engine business said at the announcement quote.
This natural gas option is a game changer as a cost competitive power option to existing diesel powertrains in the heavy duty trucking.
Making it a great complement to reduce cotwo emissions.
This new engine should make the switch by heavy duty trucking companies to R&D all of that more compelling because many of their trucks need the extra power.
Cummins has communicated recently that they've never been more bullish on the adoption of RMG.
Besides the announcement of the new 15 liter engine Cummins also recently acquired a 50% stake in momentum fuel technologies, which manufacturers CMG fuel delivery systems.
Cummins also announced that their entire RMG product line of engines has received 2022 certifications from the California Air Resources Board raising them, 90% cleaner than a new diesel engine.
It's great to have one of the most respected and trusted manufacturers of engines and powertrains continuing to make investments and advancements in the future of <unk>.
The growth of R&D continues to come from a variety of customers. For example, our longtime customer Republic services recently awarded US a contract to build new stations in Boise, Idaho, and Fremont, California that will flow R&D provided by us.
The Transit agency, Santa Monica Big Blue bus re upped its contract and we added new customers Sacramento Regional transit and gold Coast Transit in Ventura, California.
Representing about 5 million gallons of fuel a year bill.
Big Blue bus was one of our first agencies to see the long term greenhouse gas reduction benefits of operating their bus fleet on R&D and it has been a loyal customer for many years.
Another longtime customer Foothill transit, which serves a large portion of the la basin.
Express their loyalty in a different way by awarding clean energy a contract to build foothills first hydrogen fueling stations.
The station design construction and maintenance agreement as well as the hydrogen fuel supply is a tremendous confirmation of our strategy to give customers what they want as they explore ways to decarbonize their fleets not only did we have the best overall proposal and the competitive solicitation process, but foothill also recognized clean energy has passed.
Performance over the last two decades.
Providing exceptional service keeping their large fleet of buses operating on <unk>, initially and R&D more recently.
The CEO of the agency that provides an average of $14 million rise year cited our long successful track record of building alternative fuel stations and said Foothill looks forward to continuing to work with clean energy as they expanded the hydrogen fuel cell technology.
This won't be the first hydrogen station that clean energy as bill, but it is the first since Oems.
But it is the first since Oems or large vehicles have recently agreed to test their new fuel cell technologies Foothill transit Thats placed an initial order of 30 fuel cell buses that will operate on hydrogen.
I'd like to note that a third of the feedstock to create the hydrogen will be low carbon R&D.
As I mentioned following customers.
So where there are alternative fuel plants take them as a long term strategy for us we acknowledged that there will be multiple alternatives going forward Fortunately by being the pioneer in building alternative fueling stations and our 25 plus years of maintaining those stations combined with our access to the cleanest fuel in the world that can be used directly as a fuel.
<unk> or as a feedstock we believe we are in the best position in this evolving market.
But for any alternative to get a low carbon intensity rating the fuel must either be low ci itself or its feedstock must be low ci.
As everyone knows it makes no sense to power vehicle with electricity that was produced from coal from our coal power plant.
Most hydrogen produced today is not green.
That is the beauty of RMG and while we are making significant investments in its production.
Fortunately, we have two partners in total energies and BP that not only bring financial resources, but have centuries of experience in the energy business as well.
I know theres been a lot of interest by many of you to hear more details about our progress in R&D production and let me assure you it's going very well for instance, I'm traveling to the Texas Panhandle and a few weeks to participate in a groundbreaking of our new R&D facility at a large dairy.
The project is one of the first that will be financed through our joint venture with total energies.
And that same week, we will be breaking ground at our fourth dairy in the upper Midwest all of which are funded through our BP joint venture.
And just last week, we signed a contract with one of the country's largest aries, which is in Idaho to develop a new R&D production facility, which went operational will produce millions of gallons of negative carbon R&D per year.
Details of these deals will be forthcoming.
But please understand the RMG produce at these dairies I just mentioned will be coming online in 2023. After the facilities are built carve certifies the carbon intensity of the RMG in the pathways of the fuel or locked in but.
But in the meantime, we continue to secure additional R&D from dozens of third party suppliers to meet growing demand in our downstream station network.
Some of that demand is coming from our adopter Port Finance program with Chevron that you've heard me speak about.
Over 680, R&D heavy duty trucks have either received grants been purchased or in the process of being financed through the program.
Trucks will operate in the very busy ports of La and long Beach and most are owned by small companies or owner operator.
And benefited benefited from grants administered by California state agencies that clean energy helped secure.
In fact, I'm proud to say that our hard work and grants division recently surpassed the half of $1 billion Mark in securing grants to purchase new RMG trucks for our customers.
I must brag about our entire clean energy team. They have continued to perform above and beyond expectations under difficult circumstances. During these past 18 months.
At the same time, taking the company to a new level.
The sales team brought in our biggest customer in the Companys history, Amazon, which was sold on the idea of fueling their new fleet of heavy duty trucks with our RMG.
The team also signed our first LNG Bunkering contract World fuel services for two cargo ships operated by patient out of the port of long Beach when the ships to begin their regular routes back and forth from Hawaii Theyre expected to operate on LNG that reduces nitrous oxide emissions by 90% and carbon.
Oxide by 25% compared to the incumbent shipping fuel the contract is for five years, and we anticipate volumes to be at least 78 million LNG gallons.
Our engineering and construction group continues to expand our fueling footprint around the continent with 66 different station projects and progress and our superior maintenance team of men and women, which keep our customers happy and asking for more.
Since the beginning of the year, we've made some significant pivots with our focus on offering a renewable fuel that can make a huge difference in the effort to combat climate change and I am pleased to say that clean energy team has risen to the occasion.
And with that I'll hand, the call over to Bob.
Thank you Andrew and good afternoon, everyone.
Our third quarter financial results were highlighted by continued volume growth increased natural gas pricing, helping drive revenues higher and year over year improvements in our effective margin per gallon.
We also improved our cash and investment position to $260 million at the end of the third quarter compared to $250 million $254 million at the end of the second quarter.
We're maintaining our guidance for 2021 of a GAAP net loss of $86 million and adjusted EBITDA in the range of $60 million to $62 million as we described in more detail in our press release.
Continuing with my third quarter comments, our volume increases compared to a year ago third quarter largely.
Came from across all sectors with some variability around where our R&D flowed and if those volumes were incremental or already counted alongside maintenance gallons.
Our R&D volume grew 5% to $42 2 million gallons in the quarter up from $40 1 million R&D gallons in the third quarter last year.
We're looking forward to continued R&D growth as supply continues to grow.
Our effective price per gallon in the third quarter of 2021 was <unk> 77 per gallon compared to 59 cents a gallon a year ago or an <unk> 18 per gallon increase this increase reflects higher prices at the pump principally from higher underlying natural gas costs as well as higher rent and <unk>.
CFS revenue.
Our alternative fuel tax credit revenues of $5 3 million for the third quarter were in line with trends, while our station construction sales of $2 6 million were less than a year ago and lower than more recent trends the construction revenues can be.
Lumpy due to the timing of the underlying construction processes, particularly in today's environment.
We are anticipating fourth quarter construction revenues to be more in line with.
Recent construction sale trends in the $5 million to $6 million range.
Our overall gross profit margin improved in the third quarter of 2021 compared to 2020 exclusive of a noncash contra revenue charge of $2 2 million related to the Amazon warrants and a noncash fair value gain on our zero now fuel hedge of $300000 <unk>.
Exclusive of these noncash items, our gross margin was $32 2 million in the third quarter of 2021 compared to $25 7 million in the second quarter and the third quarter of 2020 or 25% improvement.
Increased volumes together with a rise in our margin per gallon from a year ago were the primary drivers of this year over year improvement in gross profit margin.
Our effective margin per gallon for the third quarter of 2021 was <unk> 26 per gallon compared to <unk> 21, a year ago. This five cent per gallon improvement reflects the difference between a rise in our effective price per gallon of <unk>.
And an increase in our effective cost per gallon of only 13.
With the cost of natural gas being at some of the highest levels, we've seen exceeding $5 and <unk> Btu I thought I would take a moment to make the point that this significant rise in the cost of natural gas did not translate to a degradation in our margin as.
As you've seen in this third quarter, our effective cost per gallon were up 13 per gallon from a year ago, but we managed an increase in revenue per gallon of 18.
Helping to drive higher overall revenues.
This dynamic of the change in natural gas costs is key to understanding that arise in the cost of natural gas does not automatically a bad scenario for US is we are generally able to increase our pump prices and we have contracts that call for commodity costs to be passed through to our customers.
Our SG&A was $22 $3 million in the third quarter of 2021 compared to $16 $6 million a year ago, an increase of $5 $7 million of which $2 7 million or 48% of the increase relates to an increase in stock compensation as expected.
We have seen some cost increases in connection with our rebranding and R&D activities, which could take us to around $86 million in SG&A for 2021, including about $13 million of stock compensation.
Our GAAP net loss for the third quarter of 2021 was $3 $9 million, which includes the effects of the noncash warrant contra revenue charges and the zero now hedge gain.
Our non-GAAP net income for the third quarter was $1 6 million or <unk> <unk> per share, which we believe is more indicative of our operating results.
Our adjusted EBITDA of $13 4 million for the third quarter of 2021 compares to $11 million a year ago, which again highlighted the benefit of increased volumes and improved margins principally associated with our R&D deliveries.
Our cash flow provided from operations amounted to $19 $9 million for the third quarter of 2021 compared to $3 4 million.
In the third quarter of 2020 exclusive of changes in operating assets and liabilities cash flow from operations was $15 $3 million in the third quarter of 2021.
This was $10 $2 million in the third quarter of 2020.
Capex spending for clean energy downstream business was $7 6 million for this.
Third quarter of 2021.
Which is up from $4 6 million last quarter and likely will increase again in the fourth quarter as our station building continues to ramp up.
Our debt was $42 million at the end of September 2021.
On the R&D upstream supply business, we've begun spending in each of the joint ventures on equipment purchases and development expenses as we get projects moving.
In the joint venture with BP approximately $22 $3 million has been spent on dairy project Capex as of September.
In the joint venture arrangement with total energies approximately $4 7 million has been spent on dairy project Capex through September.
The $4 7 million was reflected in our consolidated statement of cash flow as purchases of equipment in the third quarter as the dairy project JV with total energies was not formed until October at which time those assets were moved into the 50 50 joint venture with total.
Energies.
And we will continue to report on the capital spend and other progress on our dairy projects as we move forward.
And with that operator, we can open the call to questions.
Okay.
We will now begin the question and answer session. Joe asked a question you May Press Star then one on your telephone keypad.
Using a speakerphone please pick up your handset before pressing the key.
Jerry a question please press <unk>.
Paragon Kent.
At this time, we will pause momentarily to assemble our gross sir.
The first question comes from Mr. Robert Brown with Lake Street capital Mark.
Good afternoon.
Hi, Rob.
Just wanted to follow up on the <unk>.
And sort of the the upstream.
<unk> that youre doing.
How is that.
Is that sort of supply situation right now and how much sort of supply that you expect to come online over the next couple of years.
This is Joe sorry, your own supply over the next couple of years.
Alright, well one way to look at it as a lot of ways to slice all of that.
As our own supply, let me speak to the second this year, we brought on <unk>.
<unk> 50 million gallons of third party.
Supply coming from other suppliers. So that's an important component to this and as I look out.
Over the next couple of years too.
Look I think it's really important for everyone to understand these projects take 18 months two years to come online.
<unk> really monetize the credits.
Tribute.
We've got about 80 million 80 million gallons of.
Projects in the pipeline at present, but these things are.
Coming out all the time, so that number likely will go up over time.
But since we've been at this artist this year I think thats.
Very good progress.
Okay, Okay great.
And then maybe on the Cummins 15 liter engine that you talked about how do you sort of see the market expanding with that engine coming in.
What kind of customer growth do you think that can help drive and how do you view that engine.
Rob you've looked at this a long time and.
The current 11 nine leader.
Engine is is really very adequate for the day cabs and so.
So much of our <unk>.
Our customers at this point, our regional day cabs and the 12 liter is.
Is a good is good for them however.
I think it's important to recognize that 75% probably some of them could correct me on this but it's in that neighborhood of 75% of diesels that are being purchased are more like.
Our 15 liter diesels alright.
Alright so.
So in order to give the to have the <unk>.
Flexibility to run the routes drain and.
Sleeper cabs and kind of be able to take care of the full breadth of what you would like to have that over the road truck do and to give the driver the torque and horsepower.
That that 11 nine is in around $14 50.
In terms of torque in this this engine will be rated it will it will have it'll be variable, but it can go up to $16 50, so youre going to have more horsepower and more torque.
It's going to be able to have the heaviest loads, it's going to be able to to give that driver of the power that they really like and look one of the things that these trucking companies are needing do is make sure. They are happy drivers right.
Keeping drivers.
Is really key and so I think this 15 leader, it's going to be a ground up engine now it's coming with the <unk>.
It's been on the road now in China, it's going to be actually manufactured and assembled as American parts with American labor here, hoping thats going to get it to the market a little bit faster, it's going to have increased fuel efficiency as well. So we've always had a little bit of a.
Efficiency penalty, sometimes is ranging between 8% is slightly more I think this engine should be able to try to cut that in.
In half and so increased fuel efficiency increased torque and horsepower.
It will really be able to do everything that we that you would want an over the road truck to do so we're very excited about it I think it really fits out the.
The entire offering.
That Cummins now will have the $6 seven to nine.
The 12 leader and now the <unk> I imagine over time, the 15 will end up being the workhorse and replace the 12.
Okay, great. Thank you. Thank you for the overview I'll turn it over.
The next question comes from Eric Stine with Craig Hallum.
Andrew Hi, Bob.
Hey.
Hey.
So obviously.
Volume recovery underway I'd Love Love. It if you could maybe just drill down in your in your various end markets and then curious.
Whether you're willing to give kind of an early view of what you think volumes might be in light of this recovery in.
And we obviously want that but at the same time, we're really putting pressure on the pedal on the adoption, which is what we've always tried to do so it just puts puts.
Puts morris.
Strain on us to bring more RMG on faster as certainly as we bring on.
On Amazon and some of the other big customers like them that want this RMG, Bob you may be able to get into specifics there.
Yeah, I think I mean, the we continue to see.
A year over year growth and refuse.
Transit was in double digit.
The airports were actually.
Kind of fleet area was.
Certainly.
Positive growth there, which.
That that has taken a while to really start to come out of the recovery, but we're actually now seem kind of year over year growth there.
So.
Yeah and then.
As well as.
Kind of a trucking considering.
The RMG optimization and that sort of thing so it was kind of across the board.
And as we look.
As we look at.
Corn supply, but we are able to avail ourselves to this third party supply because we have the network. So yeah I like the I like the position, where we are but there will be there'll be quarters next year, especially if we do a good job on the on the demand side with some of these large fleets where.
<unk>.
I'll be nip and tuck in terms of whether or not.
We have exactly all the R&D, we'd like to have and the commitments that we've made.
All of our customers want the lowest R&D they can have and.
I think over time, that's going to be.
We're going to be able to supply that but I think 2022, I can see periods where.
It could be it'll be it'll be a challenge to get all that we'd like to have.
That makes sense, Eric yes, yes. It does no. Good I guess, a good problem to have but yes, its something well thats right.
That's sort of a good problem to have it's not a long term problem, but it's one that I think we just have to recognize that it is.
You bring on this Amazon and their sustainability, we talk report talked about 'twenty 700 trucks. So if you just kind of use that as a placeholder and multiply that.
Kind of an average number you can see that.
The annual number that you could see that that alone.
Would require.
40 million gallons right. So.
Calendar.
What's that number looking at it right now.
Okay.
<unk> 50 that we've secured in the other 80 is has nothing to do with our JV.
Okay, that's coming from other supply sources.
Optic we kind of refer to that as other offtake that were that we will secure.
Then our jv's.
Andrew Andrew spoke.
To that some with Rob's question in terms of like well, what our volume is going to be in 'twenty, three 'twenty four and beyond and.
And I will say that we are.
We're still tallying that number if you will when we start to really get into.
Our hope is that we'll.
Even provide more color on that in February when we do our year end because.
While you have maybe heard us say this and theres not a lot of quantification around it.
There's a lot going on where we've got we're just checking.
Second a lot of deals so we want to get those a little bit more.
Tied up if you will and then we can start to say exactly what the what some of the numbers there'll be but youre looking at.
Double digit volumes from our <unk>.
Our JV in 'twenty three.
And I am thinking.
Certainly more than 10 right in.
More on the way to 25 above somewhere in that 20 and above somewhere in there and that's just even a little starting point right now from.
What I know.
It is still moving.
Perfect I won't press you on that number of days or anything, but just a quick follow up here is as well.
There is obviously room prices on that.
You know.
I thought maybe you would press on the number of cows, but.
Because they have to.
Well really you do have to define what you mean by a big dairy or small dairy or medium dairy. So then you get down to the cows, but.
<unk>.
It's not.
It's not like a 150 dairies that we have to deal with in terms of where as we're looking at our number I can tell you that right now.
As the number of dairies is smaller than that because.
These dairies have some substantial.
Cowherd.
Perfect.
Follow up here is as.
As you come across all of these customers who want geared at N G.
All of the customers pressing use specifically is saying I wanted to zero or below zero carbon not anti or are there more or less agnostic and saying fine delivered even landfill LNG or the customers starting to make a distinction has to the carbon intensity of the RMG as you're interacting with them.
Kind of monopoly they are they are becoming more educated and.
Yes.
<unk>.
It depends where they are located just kind of depends what cycle there in terms of their sophistication.
Imagine if you sat with the customer and walk them to that they can have the lowest.
Fuel available they bought it right, but not all customers need that right now and I think that most customers understand that.
As you bring on the lower that number comes down for instance.
Our number of our portfolio is coming down right from.
<unk>.
30 or 40 positive.
Or even higher than that as you looked at it was it used to be almost all landfill and in this quarter and next quarter, it's going to be very close to negative and will begin to share that with you over time or not really prepared to do that at this time, but so and it's because we're able to blend our portfolio.
And bring down the landfill with that Super.
The negative.
See I guess so.
It will continue to go lower over time, and we'll be able to serve our customers more and more.
Negative fuel over time.
Okay.
Damn and and these other places you're seeing more and more LNG shipping is kind of sort of surprising I also think that our friends at carnival cruises ordered LNG ships.
Ships and maybe as many as 11 of them.
In my mind nine to 11 so.
Yes. This is a longterm trend these are long life assets.
And you'll you'll see it happening more and more all all around the world does it takes a link right to build a new Catherine Repower ship and so this isn't this isn't like buying a new truck.
Thank you for taking my questions.
You're welcome.
Hi.
The next question comes from crank sure with Kelly project.
[noise] good afternoon, Hey, correct.
Correct.
So.
Uhm.
That Idaho dairy project that you mentioned that sounded really big I was a little unclear. If you were talking about something in the J. These are or if you're looking at anything outside of that.
It's inside that it's in it's in one of the Jv's.
Okay. So much so that's our that's our.
Our our production or upstream.
For our account with our partner.
I Gotcha, and it's really and it's a really big Derek.
And but that's still can come online in 2023.
Yeah, <unk> probably not January.
[noise], Okay, and when something is that big <unk> cannot be ramping for a year or more after after you start you know delivery. When you have your line of women proven your tramped theoretical transportation to California, and Carb certified.
Does it take awhile to get the full capacity.
Clustering of nearby farms not unlike what you see in the oil patch right gas patch, where you're just you're you have gathering systems from several dairies and you wheel it into a central digester and that's starting to that's just getting underway, but there's gonna be great potential for that as well.
There's a new industry with lots of you know new parts to it none of it's Super.
Does that a lot of technology risk, but just a lot of things happening on it.
People get more sophisticated.
And.
And correct me, if I'm wrong, but right now all the low Ci nationwide if it has a path.
Is going to California, because of El CFS.
And I mean the.
There is a little in Oregon, I think but.
I was running pretty much going to California, which over time as it starts to grow.
Grow quicker than the California, RMG market or the California CMG market.
That will start to push.
Land fill gas out of California.
To start filling tanks nationwide because.
Amazon and other fleet operators all across the country you want to have some of that in their tanks outside of California, and then over time. The other CMG just whatever you want to call it brown or whatever that you're using.
Over time that that moves out of your filling stations and eventually.
Is gonna be more for.
The se say that.
Maritime.
Bunkering market.
You.
You get into other areas where.
They're not going to be focused.
As early maybe.
Maybe not for a decade on the LNG and am I, saying that right.
Okay.
I think I think you are I think thats right.
Already of the fuel we sell we're already at 70, some odd percent of its R&D right.
And.
But youre right so fossil fuel.
As will be replaced by R&D over time.
However, I don't know maybe the railroads will use it as LNG.
It would be significant improvement over what they've got going on.
And they use a lot of fuel so yes, I think you're exactly right there'll be other markets.
Where you are competing against very dirty unregulated sources and <unk>.
Possible, we'll go there.
And then one other thing Craig that we didn't touch on and it's important I think because this isn't just going to be a cow is not just a California story alright. So I like to think that in 2022, New York, We will adopt a low carbon fuel standard.
And typically when New York does that and it's got good support in both houses right now than state House.
And then normally the north East compact 13 states looks at US too and then there are other steady legislator legislatures are studying RMG in several states, Illinois, Pennsylvania, Michigan. So it's not inconceivable that this doesn't usually happen.
All one year it takes sometimes legislature.
Couple of years.
But it's not inconceivable that by 2024, you could have.
10 or more.
Low carbon fuels.
States, so you've just increased the demand.
And the markets for the low carbon fuel standard.
That's next.
That would be a lag, but which is a big which is a big deal.
Yeah.
I appreciate it thank you principally much.
You bet.
Yeah.
Okay.
Yeah.
The next question comes from Pavel <unk>.
<unk> with Raymond James.
Thanks for taking the question.
Alright, I'm going to ask about.
Our friends in Washington again.
So obviously, we got the build back better leased a current version published last week and there is an interesting low carbon.
Fuel credits, which has never existed before at the federal level.
Do you know how that is going to work for your product in terms of.
I believe there is I think there's it's something that's out there.
Theoretically out of the farm almost like a production tax credit.
And I don't know how it works.
Okay understood.
And.
Same thing.
Except I suppose.
Potential competitor to you guys, you've talked about green hydrogen being being scarce and being expensive.
<unk> true at.
At the moment.
If that ends up being subsidized to the tune of.
I think up to $3 a kilo is what.
The reconciliation package contains.
Do you envision that scaling up.
From kind of a de minimus levels of of today in other words, how much how much would that help for the hydrogen food chain.
It'll help.
Of course, it would help it Scott some more ways its got ways to go right because.
We've just price some of the most cost effective.
A third of it being green hydrogen.
It's more like 11 Bucks per kilogram, which is 11 bucks a gallon so.
So $3 would help.
Right and it was it was sort of six to one on a btu equivalent, but it always traded more like seven to one so at this $5.
25 by 50 wherever it is versus the $84. It was at 16 to one.
So it's still it's a 15 to $1 16 to one so it's still sort of on the upper part of the range now.
If you roll back what year or two ago at $2 gas and whatever it was we were at 23 to one.
But then I have to remind you as well.
<unk> believe you would see $5 gas like this and I still believe it will come down at some point here, but.
Recall, you get seven gallons seven two gallons of diesel.
For Mcf of gas.
So, let's just say the price of natural gas, which it did I mean essentially went from three to five it sounds like just a helluva increase.
Well, it's two bucks divided by 7%.
It's about 30 30, a gallon my feedstock web.
And as Bob Bob covered we were able to pass that through.
Either because thats the way our contracts are or.
The 20 or 30, 30% that we control.
That's at spot, we're able to pass that through because we are competing with diesel that went up on average over this last six months <unk>.
And so we are still able to give our customer which is unique to us.
$60 and 72.
Or more.
Discount per gallon relative to diesel and we absorb that increase natural gas price.
So I just do not have all of that but but truth is we've been able to move through it fine we increased our margin our customers still have a nice discount and we absorbed.
Alright, Thank you very much guys.
Okay. Thanks.
Okay.
Good morning.
It's going quick.
Then my other question just on the downstream business.
<unk> EBITDA guidance.
<unk> to be pretty strong relative to where its been the rest of the year I was hoping you could just provide some context about that and then.
As you RMG volumes ramp up and that carbon intensity score goes down do you expect your margin your gross margin per gallon to improve from that 22% to 26% per gallon range that you've been discussing.
Okay.
Yeah on the.
So on Q4, you kind of have to look historically, a little bit Q4 over the past four years.
<unk>.
In addition to our normal business all of that stuff.
We've had some other income in there, which principally was related to.
Our earn out.
So theres a little bit of help them, there I'm not saying, it's the bulk or anything but.
But that's a nuance that those that are new to the story.
Look back and say, okay, yes, they've got a little bit of annual earn out from.
From a deal we did in 2017, where we had sold.
Some upstream.
Assets and contracts to BP and so we are still taking that and so that that helps that number Sam.
So you are correct in kind of looking at the implied 21.
That's not all coming from a margin, but it is absolutely EBITDA because it is.
Core earnings and we collect that cash in the earn out and we collect that cash in Q1.
And then the.
The second part of the question.
Our margin was on the market so we'll see that.
Well.
So without giving all my 22 guidance.
Yes, but that range should should move up okay, I'm expecting that range to move up as I look forward and part of that is.
Part of that is the bringing in more dairy as well as continuing to grow higher margin fuel.
Gallons.
Alright, so theres a couple impacts that you can have there on that margin.
Great. Thanks, I appreciate that.
Thank you.
Well.
The next question comes from Greg Lewis.
With Weber research.
Q, so you'll move it you'll begin to move it to the closest but the best you can to work your portfolio you'll move it to the the closest L. C. F S state.
But I wouldn't say that we're going to start you know cherry picking locations. I mean, we were trying to bring it on any where we get it.
Got it okay. Thank.
Thank you and you also mentioned the Amazon affected an earlier answer them is something that you guys had talked about quite a bit on the past calls, but uhm any update their and what you're saying in terms of.
Vendors are suppliers, making the switch in response to Amazon or or at Amazon's direction.
Oh I can't really talk about the last part of it is but let's just say that it looks to me like Amazon is fully engaged.
The deployments are ongoing.
We're providing them a good feeling experience in 21 states.
And you know, there's many more trucks to come online.
They have and I know that they do do things to look at their scope three emissions and as we've discussed before you know they have a very big vendor pool and supplier pool and you know we hope that will design a program with them some time to address that but.
But it's just not.
Nothing specific I can get to on this call.
Okay Fair enough that's it for me. Thank you guys.
Alright. Thank you thank you Jason.
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