Clean Energy Fuels Earnings Call Nuggets: Incremental Costs and Class 8 Trucks

On March 12th, Clean Energy Fuels Corporation (NASDAQ:CLNE) reported its fourth quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Incremental Costs

Brian Gamble – Simmons & Company: Appreciate you walking through all the new markets and existing markets that are growing. That was quite a (useful), Andrew as always. It’s good to know that people are getting interested. A couple of comments you made I wanted to touch on. You mentioned incremental costs for the vehicles for a particular order in the mid $20,000 range, down from seemingly $30,000 or $35,000, I guess in my most recent notes. Was that strictly due to harder volumes or are those cost-out measures that are starting to roll through at the OEMs?

Andrew J. Littlefair – President and CEO: Brian, I think it’s a little of each. I think it’s a big – I’m not at liberty to tell you it was, but it’s a big player. So, we got purchasing power, and I think it’s a recognition that you’re beginning to see some of the cost come out of certain of the components, even the tanks for instance, and it’s not – when you look at the refuse market on that and we’ve talked about this before on the 9-liter – the Cummins Westport 9-liter, as you know, today, in a trash truck, the 9-liter natural gas engine is cheaper than the diesel engine. So, on the Class A product, we haven’t been there as long, and you’re beginning to see – to me it’s pretty – I’m very excited about it because when you just roll back two years ago, the incremental cost on the 9-liter product was $65,000. Last week, you got an order in there about the mid-20s. So, we’ve come a long way pretty fast and that’s good. Brian, at that rate, as you know, you’re using 20,000, 30,000 gallons. I mean you’re in there to a six or seven-month payback.

Brian Gamble – Simmons & Company: Okay, can you take that on a (10-year used vehicle for sure?

Andrew J. Littlefair – President and CEO: Yeah.

Brian Gamble – Simmons & Company: Then you made another comment that some users of traditional fuel trucks were becoming dissatisfied with their diesel engines. Can you clarify that?

Andrew J. Littlefair – President and CEO: Yes. Look, I am not picking on all my friends in the diesel engine business, but when they had to get to the 2010 emission standards, they had to put a lot of treatment after treatment on these trucks, and frankly, they had to kind of bring that to market sort of fast, so I’ve had some of the OEM say, hey, this is going to get better over time. But the truth is, a lot of people operating diesel trucks, certainly in the refuse market; they are not happy. They are not happy with urea, they’re not happy with the traps, they’re not happy with the heat that’s generated, they are not happy with the efficiency, and so that bundles up through a lot of guys operating diesel engines. So, it’s kind of a – not to wish anything bad on my competition, but it’s what we used to say a few years ago that the diesel engines would get more expensive and the experience would be as good, and that’s kind of what’s happened.

Brian Gamble – Simmons & Company: Lastly for me, volumes down fractionally quarter-on-quarter, kind of seemingly flat for the last half of the year, can you kind of walk us through how quickly some of these growth initiatives start to materialize and maybe what sort of volumes we can expect either first half of this year or full year ’12?

Andrew J. Littlefair – President and CEO: Well, we don’t give guidance, but we’re seeing an increase in volume. Last year it was up, as what do we say, 27%. So, I feel like it’s going to be north of that. But I really remind everybody that I think that certainly the volumes that will come from these stations that we’re building – and we’re beginning to see a ramp-up on all these refuse stations and others that we built last year. They’re beginning to be – the volumes are picking up. But for these 100 stations that we’re getting ready to build for the Natural Gas Highway, it’s really a very late 2012 – in that particular market, it’s a very late 2012 and really 2013 story, because some of the engines won’t be ready to go to latter part of 2012 and early 2013.

Brian Gamble – Simmons & Company: I appreciate the color. I thought you were done. You want to continue, please do so.

Andrew J. Littlefair – President and CEO: No. I’m done, but you’ve heard me say this before that I – nothing I have seen, and in fact, everything I’ve seen in the last six months has been more bullish. When I look at the adoption rate on the refuse sector and I laid that on the Class 8 sector, you are getting pretty serious volume. So it’s got me as stimulated and as excited about what’s going on out there than I have ever been.

Class 8 Trucks

Steven Milunovich – Bank of America Merrill Lynch: Andrew, could you maybe size the Class 8 markets for us? How big it is, how many of those trucks you think are applicable to what you are doing and just kind of give us a sense, what kind of gallons that mean could mean for you?

Andrew J. Littlefair – President and CEO: Sure. Let me try, Steve. These numbers, I think everybody can come up with a different set of numbers, but I have been told by my friends in the trucking industry these are okay. So, I believe in what I think is a pretty good number if you talk to the American Trucking Associates. I think there’s about 3.2 million Class 8 trucks. So that’s what we think of as over the road 18 wheelers and the number of trucks sold into that market every year is a little bit under – if you exclude Canada and I don’t know that we should for this, but that’s okay, let’s exclude Canada, it’s a little bit under 300,000, it’s about 280,000 or so per year. Of course, that depends on the economy. A few years ago it was 180,000 to 200,000 when we had a real tough economy, guys weren’t buying trucks. When you look at some of the banks that run models on this, they are kind of calling in somewhere between 275,000 to 300,000 out for several years to come. So, when we look at that and Steve I think I have talked to you about this before, but I really think the best way to look at it, because the incremental is coming down much like that first good Cummins Westport engine that really was the workhorse in 2008, and in that year it was 3% and then we went to – in 2009 it was 7%. So, we’ve really – I think the way to do that is really look at that, figure that these engines really won’t be – you are going to have a bunch sold into this year, which we are very excited about, but most of them are going to be done later part of this year and the big time in 2013 and 2014, you really get rolling. I think that still allows you to look at something – our penetration rate is 3%, 6%, 12% and I think it will be very similar, maybe even faster, I maybe being conservative, but when you do that, based on the 275,000 to 280,000 trucks, Steve, by the time you get to 2016, 2017, you are 3.2 basis points gallons a year just on the fact that you in – by late 2016 you will 250,000 over the road trucks using 3.2 billion gallons. So, it could be bigger than that, but I mean let’s start there and I feel pretty good about that. That’s what we think is going to happen as a minimum.

Steven Milunovich – Bank of America Merrill Lynch: What kind of growth do you think you might need in SG&A this year to (indiscernible) make that cutting on the road?

Andrew J. Littlefair – President and CEO: Rick, you want to help me a little bit here on math?

Richard R. Wheeler – CFO: Absolutely, Steve, I think from an SG&A perspective we anticipate we will continue to increase our expenditures this year as we invest in people and resources and infrastructure and all that good stuff. Our goal and effort and what we are trying to do is kind of keep it at a consistent percentage of revenue for the next couple of years as we really grow this thing, and then obviously as we’ve talked before, we think it’s leveragable, that it would go down in the future, but if we can keep it in the 30% range of revenue, that’s kind of our target.

Steven Milunovich – Bank of America Merrill Lynch: Okay. Can you talk about barriers to entry? I think the world’s starting to believe this is going to happen and that’s likely to bring more folks into it. I think there’s often a perception that the barriers are fairly low here. I assume you disagree with that to some degree. Could you enumerate your reasons why not?

Andrew J. Littlefair – President and CEO: Well, we’ve talked – a lot of people on the call talked about this before. Can other people be in a fueling business? Sure. But I always like to start out by saying, this is different than the passenger car market. So, let’s for – at least for the moment take the integrated play, the majors out of this, because they’re not really in this market. They’re not fueling trucks and they’re not fueling trash trucks and they’re not – that’s not their market. So, if we thought that every passenger car in the United States was going to go to natural gas, I think I’d have a harder story on that. I’m not going to get wiped out by somebody that has 5,000 or 10,000 fueling stations. When you look at the truck market, it’s a little bit different story. The more I’ve gotten to know our partners at Pilot Flying J, the more impressed I am of what an operation they run. But think with me that they have 450 truck stops, Pilot Flying J truck stops in the United States that sell somewhere around – I don’t know, 8 billion gallons of diesel to 1 million transactions a day and so – and they’re my partner. So when – Steve, when you asked about the market size – the 3.2 million Class 8 trucks, those Class 8 trucks use about 24 billion to 25 billion gallons of diesel. So, they got a pretty big piece of the market, and they are our partner and that’s why we’re rolling out there. So, I think that was a key strategic move to partner with Pilot Flying J, and we’ve announced some others, they don’t get quite the cache, but we’ve signed up the Quarles Petroleum people in the Mid-Atlantic that have a 180 locations, and we have several others that will be announced soon. We think this is a very key piece of this business which is to have locations under contract, under long-term exclusive arrangements to that. We can put LNG truck stops in where the America’s trucking fleets go. So, I think in one way that’s probably the most important – and I don’t like barriers to entry. I think that’s one of the most strategic advantages we have. Now the other thing is, is we have a compressor company – other people can get those, I know that. We have one of two LNG fabrication and construction companies that we have, and we have a nationwide network of construction people building these, and we operate now – we have contracts in 650 of the nation’s largest fleets. So, we’re already doing business with a lot of these. That doesn’t mean we couldn’t be displaced, but we think that’s the advantage. We have LNG plants, we understand LNG supply, we have an LNG cryogenic tanker fleet; and so, Steve, what I think, we’ve been in the business enough, and after all we’ve spent – I don’t know, $600 million, $700 million, $800 million, so it sounds like we’ve just been casual about this. We’re building out – we are way ahead. I mean, nobody else has really built – there’s been a handful of LNG fueling stations, nobody else has done what we’ve done. So, I think when you put all of that together, we’re pretty far out in front of the crowd. Now, I think we will have competition and we’re starting to see little pieces of it pop up, and I think that’s just – I think that’s frankly is good news. I think that validates the fact that we got a real business.

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