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Edited Transcript of CLNE earnings conference call or presentation 9-May-19 8:30pm GMT

Q1 2019 Clean Energy Fuels Corp Earnings Call

SEAL BEACH May 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Clean Energy Fuels Corp earnings conference call or presentation Thursday, May 9, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew J. Littlefair

Clean Energy Fuels Corp. - Co-Founder, President, CEO & Director

* Robert M. Vreeland

Clean Energy Fuels Corp. - CFO

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Conference Call Participants

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* Aaron Michael Spychalla

Craig-Hallum Capital Group LLC, Research Division - Associate Analyst

* Robert Duncan Brown

Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst

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Presentation

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Operator [1]

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Greetings and welcome to the Clean Energy Fuels First Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

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

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Robert M. Vreeland, Clean Energy Fuels Corp. - CFO [2]

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Thank you, operator. Earlier this afternoon, Clean Energy released financial results for the first quarter ending March 31, 2019. If you did not receive the release, it is available on the Investor Relations section of the company's website at www.cleanenergyfuels.com, where the call is also being webcast. There will be a replay available on the website for 30 days.

Before we begin, we'd like to remind you that some of the information contained in the news release and on this conference call contains forward-looking statements that involve risk, uncertainties and assumptions that are difficult to predict. Words of expression reflecting optimism, satisfaction with current prospects as well as words such as believe, intend, expect, plan, should, anticipate and similar variations identify forward-looking statements but their absence does not mean that the statement is not forward-looking. Such forward-looking statements are not a guarantee of performance and the company's actual results could differ materially from those contained in such statements. Several factors that could cause or contribute to such differences are described in detail in the Risk Factors section of 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 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.

With that, I will turn the call over to our President and Chief Executive Officer, Andrew Littlefair.

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Andrew J. Littlefair, Clean Energy Fuels Corp. - Co-Founder, President, CEO & Director [3]

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Thank you, Bob. Good afternoon, everyone, and thank you for joining us. I'm pleased to report that the company's operating and financial performance continue to improve through the first quarter of this year with a 12% increase in volume, 7.5% growth in revenue and improvement in operating a net income when excluding the alternative fuel tax credit from last year and the noncash adjustments from 2019.

Also importantly, the initiatives that we began over a year ago to strengthen our balance sheet continue to pay off as we ended the quarter again, with cash and investments exceeding debt. Our volume grew over 10 million gallons quarter-over-quarter, as we delivered a total of 95.2 million gallons with our Redeem renewable natural gas making up over half of that volume increase.

Our core business of Refuse and Transit saw growth as did our subsidiary NG Advantage and we're optimistic that the heavy-duty trucking market will contribute to that growth later this year through our Zero Now Financing program. I know there has been a lot of interest in this program. I'm pleased to report that we began to sign-up fleets that are taking advantage of the offer to lease or purchase heavy-duty trucks.

These trucks were equipped with the latest natural gas engine technology for the same price as a diesel truck, and operate it with the fuel that's -- that is renewable and significantly cleaner but comes at a lower cost. As I explained on our last call, unlike what you hear from others, we are engaged with fleets that are ready to take delivery of trucks, which is different than simply putting down a deposit for a concept truck that won't be ready for delivery for years. Through our Zero Now program, we have agreements with multiple firms, which are leasing or purchasing new trucks equipped with the Cummins Westport 12 liter ultra-oil NOx engine and will be fueling at our existing network of stations with Redeem renewable natural gas.

These companies include Tradelink Transport and Supra National Express, which operate in the ports of Los Angeles and Long Beach where the latest Clean Air Plan continues to be implemented. Orders for new trucks were also placed through the Zero Now program by the largest bulk carrier Kenan Advantage Group. Freight Line Express will be taking delivery of new trucks in Northern California. And after testing beta versions of the new CWI engine, TTSI has placed an order for an additional 40 trucks to operate in Southern California. In addition to these companies, we're in advanced negotiations with several dozen other fleets, which represent the potential of orders for hundreds of new natural gas trucks.

The media limelight is currently placed on other alternatives like electric and fuel cells, including at the recent ACT Expo. But I'd like to quote one savvy analyst who has paid very close attention to this industry for many years, in his report after visiting the floor of the Expo, he wrote, "natural gas is the clear-cut leader in the clubhouse and what other technologies aspire to be." The trucking companies we've been speaking to are under pressure to meet lower emissions targets today, while maintaining the performance of diesel and the only solution available is natural gas trucks. They have seen stories about recent rollouts of electric buses by few transit agencies that have encountered serious operational issues like the lack of battery range, charging times and ability to climb hills.

Albuquerque Transit Agency experience was such a disaster, they sent back all of the electric buses to the manufacturer, scrapped the program and are in the process of ordering new natural gas buses. Transit agencies can easily experiment with electric buses because the federal government foots the bill for the -- almost the entire cost. But trucking fleets don't have the luxury of the government covering such costly experiments. So while others are grabbing easy headlines with big promises of the fuel of the future with very few details, we're signing on trucking firms to a solution that tackles air quality and long-term greenhouse gas issues today while giving them the performance they expect at a cost that is less than diesel.

As I mentioned earlier, our core business continues to grow at a nice pace. During the first quarter of this year, we signed agreements with a number of transit agencies including BC Transit serving the Vancouver Canada area, which will be introducing 60 new CNG buses that are expected to consume 720,000 gallons of fuel a year. We've built and maintained 3 stations for BC transit. The City of Fresno renewed a contract for the delivery of an anticipated 6 million gallons of Redeem to fuel 118 buses. The City of Santa Clarita signed for estimated 1.9 million annual gallons for 126 buses. The Port of Seattle signed a contract that includes an estimated 400,000 gallons of CNG for airport shuttle buses.

LAX Airport contracted for Redeem to power 31 shuttle buses. San Metro in El Paso is adding 40 CNG buses that we will fuel. Los Angeles Metro signed with us to provide an expected 4.8 million gallons of Redeem to power 41 new municipal buses over their life. And the County of Sacramento contracted for Redeem to operate a fleet of school buses and airport vehicles. Finally, the County of Orange Public Works Department signed 5-year fuel deal for an estimated 750,000 gallons of RNG.

On the Refuse side, we signed agreements for fuel and services in the first quarter with Livermore Sanitation in California; the City of Tacoma, Washington; Alameda County, California; USA Hauling and Recycling in Waterbury, Connecticut; the City of Philadelphia; Burrtec Waste Industries; the City of Redlands, California; and the City of Sacramento, California.

All in all, the first quarter of 2019 was very productive and reinforces our optimism about the future of Clean Energy and Natural Gas fueling. Our financial performance and balance sheet continues to improve. The acceptance of Redeem is accelerating with existing customers switching from conventional natural gas and new customers were signing up for a renewable fuel that far exceeds climate change goals versus other alternatives.

Our core business continues to grow in the heavy-duty trucking market, which has been a tough nut to crack in the past, has begun to show signs of real progress. Looming stricter emission standards, higher diesel prices now weigh for heavy-duty truck fleets to get into a new natural gas fleet for the same price is catching a lot of notice from fleets that were previously reluctant.

And with that, I will hand the call over to Bob.

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Robert M. Vreeland, Clean Energy Fuels Corp. - CFO [4]

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Thank you, Andrew. Our financial results for the first quarter of 2019 were in line with our expectations and we maintained our financial outlook for the full year 2019, which we provided during our year-end 2018 earnings call.

Our volume growth in the first quarter of 12% above last year came from CNG and LNG, both benefiting from incremental Redeem gallons related to our expanded BP relationship. CNG volume also increased as a result of growth at NG Advantage and from our Refuse and Transit sectors. LNG also increased due to greater bulk fuel deliveries compared to a year ago. Redeem volume grew 87% in the first quarter to 34.6 million gallons versus 18.5 million gallons a year ago. Our revenue for the first quarter of 2019 was $77.7 million, which included a $5 million noncash loss on our Zero Now fuel hedge. Last year, first quarter revenue of $102.4 million included $25.5 million in alternative fuel tax credits related to the calendar year 2017.

The alternative fuel tax credits expired at the end of 2017. Excluding the noncash Zero Now fuel hedge loss in 2019 and the alternative fuel tax credit revenue in 2018, total revenue increased 7.5%, which reflects greater volumes at higher effective prices per gallon driven by RIN and LCFS prices as well as retail pump prices.

Our overall gross profit margin in the first quarter of 2019 was $18.9 million, which was reduced by $5 million from the noncash Zero Now fuel hedge loss. Gross margin in the first quarter of 2018 was $47.6 million, which was increased by the $25.5 million in alternative fuel tax credit. Exclusive of the $5 million reduction from Zero Now fuel hedge loss and the $25 million increase -- $25.5 million increase from the alternative fuel tax credit, our 2019 gross profit margin increased by $1.7 million or 8% from a year-ago due to increased volumes, offset partially by a decline in station project margins. Our effective margin per gallon was $0.26 per gallon for the first quarter of 2019, consistent with a year-ago and within our guidance range of $0.24 to $0.28 per gallon.

The first quarter of 2019 benefited primarily from higher Redeem renewable natural gas sales and the related RIN and LCFS credit revenue compared to 2018. Our SG&A in the first quarter of 2019 was $18.4 million versus $18.9 million a year ago.

Looking forward, we see some increases in quarterly SG&A spending, but for the year, we still anticipate being within our expected range of $73 million to $79 million. We also recognized a $2.7 million gain related to the sale of station assets. This was part of an eminent domain process to accommodate improvements being made near one of our airport stations.

Our GAAP net loss for the first quarter of 2019 was $10.9 million compared to GAAP net income of $12.2 million a year ago, although last year, included the favorable impact of $25.5 million in alternative fuel tax credit income, while 2019 was negatively impacted by noncash losses of $6.6 million related to the Zero Now fuel hedge, plus the change in fair value of stock warrants of NG Advantage. We saw the benefits of our lower debt balances in 2019 with interest expense declining by $2.6 million for the quarter compared to a year ago, going from $4.5 million in the first quarter of 2018 to $1.9 million in the first quarter of 2019.

Our adjusted net loss for the first quarter of 2019 was $2.7 million compared to adjusted net income of $15.6 million in 2018 and our adjusted EBITDA for the first quarter of 2019 was $11.2 million compared to $32.4 million in 2018, noting again that 2018 included $25.5 million in alternative fuel tax credit income.

We ended the first quarter of 2019 with $94 million in cash and investments, which was essentially the same amount of cash and investments we had at the beginning of the quarter. Cash used in operations in the first quarter of 2019 of $8.2 million was offset with $5.1 million in cash received from our second year of a 5-year earn out from BP, and $4.4 million in proceeds received from the station asset sale noted previously.

In addition, NG Advantage received $3.4 million in proceeds from equipment financing, which we view as an offset against purchases of property and equipment. Our convertible debt due in June 2020 is unchanged at $50 million and our equipment and facility financing debt principally held at NG Advantage is at $36 million.

As we see growth in our Zero Now truck program and expansions at NG Advantage to support increased gas flow capabilities, we will likely see an increase in our debt balances during 2019. Keeping in mind, this debt will be directly attributed to contracted volume growth. With that operator, we will now open the call to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Eric Stine, Craig-Hallum.

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Aaron Michael Spychalla, Craig-Hallum Capital Group LLC, Research Division - Associate Analyst [2]

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It's Aaron Spychalla on for Eric. Maybe first on the Zero Now pipeline, good to see and hear some of the recent traction there. Can you just maybe give a little bit more color on maybe what some of the gating factors that you are looking for before some of those fleets move forward with some of the larger purchases? And then maybe just talk a little bit about your outlook to get to that? We've kind of been thinking that as around maybe a 2,500 truck program to start and maybe the potential to grow beyond that?

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Andrew J. Littlefair, Clean Energy Fuels Corp. - Co-Founder, President, CEO & Director [3]

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Right. Aaron. I'm still -- we came up with that 2,500 number because that was just doing math of about $40,000 per truck and our friends at Total had helped us with a debt for about $100 million. But I still think it's a good number and it's one that we're shooting for. We've been at it here for a while, started in the late summer of last year. It took us a while what the gating factors are, it took us a while to basically reeducate fleets. Kind of if you think with me on that, what happened was, you have to go back a couple of years to the collapse of oil price with really the previous heavy-duty engines, some of which were the early -- earlier engines, and some of the experience was, we had some of the early adopter problems with some of those engines, this, of course, now is a new day with the new 12-liter Low NOx engine. And of course, today we have renewable natural gas.

And so when we came out with the Zero Now Financing, we needed to go back and really educate fleets about the current state of play, the current engine technology, what was different this time. We had to explain the Zero Now Financing and why they could now move into natural gas truck at essentially the same price of diesel, explain the hedge, which you know is very attractive as we've discussed before on this call as we're able to lock our customers into a fuel deal at a -- depending where they operate as much as $1 a gallon fixed to the EI Index for the length of that lease, in many cases 4 to 5 years, so very attractive. This still takes a while, and before we can end up signing the deals, we take several steps and then they have to order the trucks, right? And sign a fuel contract with us, which is new.

And so I'd like to say, there really aren't any showstoppers here, it's really one of education, and it's one that we've continued to do. We've continued to increase the pipeline. So I'm feeling good about that, I monitor it regularly with our Vice President of Sales. And the pipeline continues to grow that is the number of fleets that are entertaining purchases of trucks. But then we have to move them through the process. So that release a couple of days ago got you to where we are today, and is what I mentioned today is, we've got more than we are in the negotiation process with negotiation and contracting phase today.

So I'm feeling pretty good about the way that's going. But this is buying a real truck for $125,000 committing to 5 years' worth of fuel even though it's at a discount. This isn't putting down an order, this is a reservation, this is buying stuff. And so in many cases when we're talking 20 or 30 trucks, you're into millions and millions of dollars. So these guys take it seriously. They are faced with the higher diesel price today. I note that today diesel in the Port of L.A. is at $4.09. So we have a very competitive price. So I hope that maybe helps. We still -- I think that 25 number -- 2,500 truck number is a good number, though it will take us the entire year to get to that number, and of course, you won't see all those volumes this year, but you will begin to see it in the next year.

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Aaron Michael Spychalla, Craig-Hallum Capital Group LLC, Research Division - Associate Analyst [4]

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Right, understood. Thanks for the color there. Maybe second, can you just give an update on some of the programs down there in California whether it's the ports or with the SIP or in the South Coast, may be kind of what you're looking for there, kind of near-term as far as any kind of funding dollars or truck deployments? That would be great.

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Andrew J. Littlefair, Clean Energy Fuels Corp. - Co-Founder, President, CEO & Director [5]

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Well, there's a lot of pieces to all of that. But for those on the call that maybe aren't quite as familiar as you are Aaron, there is -- of course, there's a thing called the State Implementation Program, a lot of the states have this that are not in compliance. Certainly, the Southern California still has the dirtiest air quality in the nation. We have a plan that we have to get into compliance, I think it's by 2023, and we will make sure, right. Inventory of admissions and what we'd need to do to get into compliance to theoretically continue our federal funding and all that kind of thing is, we've got a lot of work to do. In fact, at its highest level, I think that the plan would say that you've got to get 70,000 heavy-duty trucks to like a Low NOx truck and 150,000 medium-duty trucks. Now I don't see any rules or funding or anything in place right now that gets you there. But that just tells me that they are going to be other emissions requirements and other -- and continued grant funding because 70% of the problem that we have in Southern California is NOx and that's coming from these heavy-duty vehicles.

All right, so now then, if you look at the Clean Air Action Plan, which governs the -- it has been adopted by the Port of Los Angeles, and jointly by the Port of Long Beach, you know those 2 ports sit side-by-side there. They adapted a plan that had stuff on ships, and yard hustling equipment and also of course, trucks. And this was kind of Phase 2 of the plan, because 10 years ago they cleaned up some of the diesel trucks and introduced natural gas trucks. That still is in place. That plan essentially says that by 2020, the business as we see it today is not the way it could go, that in order to comply, in 2020, you're going to have to either buy a near 0 natural gas truck or an electric truck. And if you continue -- you can continue to operate a diesel truck but they are now working on what the fee will be associated to operate that diesel truck, they're doing some economic analysis to see how high that fee needs to be, and make sure they don't destabilize the competitiveness of the port.

I think that's all kind of rocking along. There's a lot of tension there between people that don't want to do things and people that would rather slow this down. I'm betting that it's going to continue to be in place. We see a lot of grants from the State of California and even locally to assist in this transition. I think there's close to 400 trucks that have already been granted money that could participate and will participate in this program. A lot of those contracts are in the process in the next month now, so I'm guessing by the latter part of this year we could see a couple of hundred to 300 -- 350 natural gas trucks in the port. These will be early adopters as the rules won't have gone into effect. But I think it'll be a very nice, by the end of the year, if I'm right, you'll have 300, there is about 50 down there right now, so you'll have close to 400 trucks operating, showing what's viable today, and why it works, and these trucks will be saving money versus the prospect of maybe waiting another 5 years for electric trucks.

So I think all of that is going to happen in the future, in the Port of L.A., as if the fee goes in as we expect that there is probably somewhere north of 10,000 trucks over the next couple of 3 years that will have to be retired. We saw the fee last time around, switched the fleet pretty quickly because the Walmarts of the world don't want to pay a fee, they want to hire somebody that's in compliance. So we're very optimistic, we have, as you know, the fueling down in the port, we have the product today, we have to grant some place. So I think you're going to see this as the beachhead for a lot of movement on the -- we also run kind of a modified Zero Now program for the port too. But that was a lot, I hope that answers your question.

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Aaron Michael Spychalla, Craig-Hallum Capital Group LLC, Research Division - Associate Analyst [6]

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No, no that's real good color, we've been kind of hearing some of the same stuff there, so thanks for the detail. And then maybe last, just kind of on the model a little bit on the station construction line, can you just kind of talk about how you think that trends the rest of the year and kind of the outlook, the mix there between new stations and upgrades?

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Andrew J. Littlefair, Clean Energy Fuels Corp. - Co-Founder, President, CEO & Director [7]

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Yes. I mean it generally trends up as we move through the year. We were -- we kind of guided to the $25 million, $30 million range, and we still believe we will get inside that range. It gets -- it can be a little lumpy, but generally speaking, the activity picks up as we move through the year. I know Aaron, right now there's about -- I was talking to our people in-charge of this, earlier this morning, you have about 22 stations that are currently in process, and there will be more, I think there were 2 more added in just in the last day or 2. Our fillers were at the waste -- the big waste convention and usually they come back with some of those. So it seems to me that the station construction line is a little lighter than we've seen it before, and I think we've kind of guided to that. It's still robust, but it's not as high as we've seen maybe a couple of years ago. I imagine, when you shake it all out, it'll be somewhere -- and I'm not talking millions, I'm talking about projects now, it will be in the 30 -- we'll have 30 projects or so underway here in the third quarter, fourth quarter.

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Aaron Michael Spychalla, Craig-Hallum Capital Group LLC, Research Division - Associate Analyst [8]

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Congrats on another good quarter of volume growth.

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Operator [9]

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The next question is from Rob Brown, Lake Street Capital Markets.

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Robert Duncan Brown, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [10]

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I just want to touch on Redeem and the -- that market. How is the volume supply in that market? Are you seeing any constraints there as you grow? Or do you feel like you've got the capacity or kind of tracks in place to fulfill the demand?

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Andrew J. Littlefair, Clean Energy Fuels Corp. - Co-Founder, President, CEO & Director [11]

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I think we're, in general, balanced right now. We're seeing volume, more supply coming to the market, which is a good thing, because we're getting more customers come to the party. If you kind of look back over the last couple of years, at one point, we're a little short on supply, and then there's been more supply coming to the market. We work with our friends at BP for instance, and we're constantly looking at showing them our demand forecast, and they're constantly looking at more supply. The market is responding in terms of supply, and we were doing our part of the demand side of the equation. We have a lot of customers in areas of the country where we're not using RNG yet. So we can use more supply and the good news is, that supply is coming. I think we're going to be, in general, supply balanced for this year, and then a bunch more supply shows up, which will be timely because we're going to need it.

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Robert Duncan Brown, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [12]

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Okay. Great. And then in terms of cost structure, you have done a good job of taking it down, do you feel like you're at a level here that where you want to be or do you see it -- I guess, where do you see it going?

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Andrew J. Littlefair, Clean Energy Fuels Corp. - Co-Founder, President, CEO & Director [13]

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Well, I think Bob gets worried when you start doing the modeling. I think this is generally -- this level of SG&A is about right. It's down a little bit this quarter, it may pop up just a little bit, but it's in this range. This feels comfortable for us, we're growing, we're building more stations, we are putting more customers in the program and yet we've been able to kind of hold the line, we're trying to do some things though, on the marketing side, which will add some -- a little bit of cost that you'll see, probably hear this next quarter as we promote with shippers and others on the Zero Now program. But I'd say, this is generally about the right -- we're about -- we got it about as tight as we can get it on the SG&A line, and I think this is a pretty good number, don't you Bob?

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Robert M. Vreeland, Clean Energy Fuels Corp. - CFO [14]

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Yes. I think it's -- we're good right now, and we constantly kind of look at that, and what we think we need to do to support the business and grow the business. So that's why I commented we may not see as lower quarter as we go forward a little bit because we still have work to do on promoting Zero Now and other programs, it takes a lot of effort to be out there promoting what we do.

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Operator [15]

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There are no further questions at this time. I'd like to turn the floor back over to management for closing remarks.

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Andrew J. Littlefair, Clean Energy Fuels Corp. - Co-Founder, President, CEO & Director [16]

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Well, thank you, operator. Well I want to thank everyone for listening today on the call this afternoon. And we look forward to updating you on our progress next quarter.

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Operator [17]

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Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a good day.