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Quit Calling It Smart Beta

Click to enlarge Image source: istockphoto.com. Used with permission. Quit Calling It Smart Beta Last week, an advisor forwarded me this Financial Times article, ” Smart Beta Not Quite as Clever as Marketed ,” asking for my comment, to which I immediately responded, “the only aspect of the article I agree with is the title.” Since arriving at 3D Asset Management, I’ve published two articles on ETF investing: ” ETF Product Development: Innovation Versus Over-Engineering ” and ” Why ETFs (and Why Strategic Beta ETFs) .” In both these articles, I have advocated for our use of factor-based ETFs, commonly known as alternative beta or strategic beta. Despite what appears to be an industry-wide adoption of the term, I refuse to use the label ‘smart’ beta for factor-based ETFs. Here is what I wrote in “ETF Product Development:” …’smart’ beta (factor) investing is not ‘smart’ at all but just a reformulation of the Dimensional Fund Advisors’ (DFA) strategy of investing in areas of the market which have afforded higher risk premia over the long run. ‘Small cap’ and ‘value’ factors outperform over the market because they come with higher risks which investors are compensated for over the long run – these factors are no ‘smarter’ than a traditional market-cap based approach such as the S&P 500. ‘Smart beta’ is a marketing label used by ETF sponsors to get advisors more comfortable with alternative methods of indexing. But it is no more nefarious than that, unlike what is implied by the Financial Times article critiquing factor ETFs. The rollout of strategic or alternative beta ETFs reflects innovation on the part of ETF and index providers to give retail investors access to market segments and themes historically only available to professional/institutional investors. What follows is a section-by-section critique of the FT article: Has the investment industry’s marketing push outsmarted itself? For several years, huge effort has gone in to selling “smart beta” funds. It has worked, creating great excitement. Now, not at all surprisingly, the backlash has begun. 3D’s Response: “Backlash” from whom? From those most threatened by the advent of factor-based ETFs? Strategic beta ETFs capture much of the systematic elements of many actively-managed strategies in cost-effective and tax-efficient vehicles. So who feels most threatened by this wave of product innovation? That is, of course, rhetorical. Smart beta comes up with a strategy to beat the index, which can itself be made into an index with simple rules. The advantage of doing this is that funds that track an index can be run far more cheaply than active funds, which face a far higher bill for research and managers’ salaries. So if a winning strategy can be reduced to an index, it should be possible to cut costs, and offer a superior return to investors . 3D’s Response: Agree with most of this statement, except this notion of “winning.” The goal of investing isn’t to ‘win’ but to achieve long-term financial goals, whether with indexing or with active management. If the focus is just on ‘winning’, then one misses the entire point of investing in the first place. For instance, a dividend-focused strategy is designed not so much to outperform the broad market-based benchmark (i.e. the S&P 500) but to provide investors with desired portfolio characteristics, namely 1) total returns sourced more from dividend income than capital appreciation and 2) lower equity market sensitivity. Does this strategy ‘lose’ if it delivers on this objective even though it may underperform the market-based benchmark? Smart beta strategies are now proliferating but most commonly stem from anomalies identified in the academic literature. Perhaps most importantly, there are Value (cheap stocks do better than expensive), Momentum (winners keep winning, and losers keep losing), and Low volatility (relatively stable stocks perform better). All will have periods when they do badly. All perform well in the long run. Other popular strategies involve weighting portfolios by companies’ sales, or revenues, or dividends . From these building blocks, investment managers have now built multifactor funds in different proportions, and come up with a dizzying array of new factors. And they have sold a lot of funds on the back of it. 3D’s Response: As a former quantitative portfolio manager, I can reasonably say that most of the historically effective factors are now captured in some form by ETF products. I don’t know what the true library of significant and investable factors consist of, but I am confident it is between the three originally proposed by Fama/French (market, size, value) and somewhere in the range of 15-20. But is it a “dizzying” array? First, one must distinguish between an ETF that captures an historical risk premium or anomaly such as value or momentum versus an ETF built on rules designed to capture a specific investment theme such as Goldman Sachs Hedge Fund VIP ETF which would screen for top hedge fund holdings of individual stocks. Second, the ‘dizzying’ array of factors is partly driven by legitimate differences on what is the best rule-based design to capture a factor. Strategic betas such as value and quality can be defined differently, but many of them achieve similar results. ETF strategists such as ourselves conduct due diligence to get underneath the hood on what the factor is trying to achieve and then provide research opinions on whether a particular ETF provides the best rules-based design given the cost. But there is a problem. In theory, and in practice, once a market anomaly has been observed, it cannot continue. There are two reasons why future performance may be worse than the historical backtest suggests, outlined by Pete Hecht, chief market strategist for Evanston Capital Management, in a recent paper. First, the back-test may have been “data-mined.” In other words, the researchers fiddled to find a formula that delivered the very best result for the period they were looking at. This may be due to dishonesty, or may happen unconsciously. 3D’s Response: First, a straw man warning. Pete Hecht from Evanston may be correct in his observation of Fama/French, but some disclosure should have been made that Evanston has a vested interest in dismissing smart beta as a flash in the pan fad since Evanston serves as a multi-manager hedge fund-of-fund, whose value proposition (along with much of traditional active management) is under competitive threat from strategic beta investing. That said, Hecht’s first argument is facetious at best and indicts any data-driven approach to investing. There are clear standards for what constitutes robust backtesting, namely is the observed factor anomaly consistent, robust, and reliable across time and across different markets? There is ‘true’ data mining which is to throw as much stuff on the wall and see what sticks and there is robust backtesting where there is a clear and intuitive rationale for the observed behavior. A second problem is arbitrage, and the very existence of smart beta funds feeds this problem. Once you know that cheap stocks outperform, the logical response is to buy cheap stocks. If many do this, cheap stocks’ price will rise until they no longer outperform. 3D’s Response: This ignores the fact that underlying factor behavior is a risk-premium or behavioral explanation. ‘Arbitrage’ implies there exists some systematic mispricing between two or multiple assets and that a well-functioning market should reduce this mispricing such that it cannot be exploited over a sustained period of time. However, those who hold to a risk premia view of factor investing believe such premia exist precisely due to rational pricing on the part of investors. Take the value risk premium as an example. As Fama/French originally argued in their 1992 paper, ” The Cross-Section of Expected Stock Returns ,” the value effect (as proxied by book value/market value ratio) is “the market’s assessment of its value [which] should be a direct indicator of the relative prospects…” In other words, ‘cheap’ stocks are cheap for a reason, because they are riskier than the overall market. Cheap stocks tend to be financial companies that trade close to book value due to regulatory or financial leverage reasons or companies with highly cyclical (and uncertain) earnings that the market is not willing to assign a premium multiple to. I won’t delve into the rationales driving the other main factor categories, but the historical size and value risk premia as documented by Fama/French are rooted in highly intuitive economic rationales and not the result of some creative backtests with no fundamental rooting as implied by the FT article. Mr. Hecht took Mr. Fama’s formulas for determining which stocks were cheap, and saw how the strategy would have performed starting in 1992 and carrying on to the present. In all cases, whether measured by straight performance or adjusted for risk, they did much worse after the paper’s publication than they had before it. The reduction in performance ranged from 30 to 71 percent. The value effect had diminished. 3D’s Response: There is some evidence that the long-term risk premium has shrunk as market participation has expanded and has become more electronic and global. However, Mr. Hecht’s observation wouldn’t just apply to the value premium but to the entire market risk premium itself. If equity market investing has become less ‘risky’ then investors should expect to be compensated with less return over time. But common sense intuition would hold that equities are riskier than bonds over the long run and that risk can fluctuate during different economic and inflationary cycles. Otherwise the entire notion of rational capital pricing would collapse into absurdity. No one would suggest that the equity risk premium should go to zero (except these guys ) just because the markets have gotten more efficient. Likewise, few would argue that small cap stocks should not trade at a premium versus large cap stocks (i.e. would you be willing to accept the same premium for holding Pfizer (NYSE: PFE ) than you would a small, speculative biotech?). And the same holds for value stocks as mentioned above. However, Hecht’s second argument brings up broader implications for active management. If there is a diminishing return to value and small cap investing (and it’s debatable since size and value have shown long-term persistency across multiple markets), then this would have profound implications for all of active management, not just strategic beta. Hecht’s arguments of diminishing returns to factor investing has even worse implications for traditional active management and hedge funds where much of the alpha they provide can be sourced from such systematic factors. As more active managers and hedge funds become ‘discovered’ and ‘popular’, then presumably their edge in delivering alpha should also be reduced. That leads to another problem, identified by Rob Arnott in a paper for Research Affiliates, a pioneer of smart beta. A strong backtest at any point in time, he reasons, may be because the factor tested has become expensive. Very perversely therefore, a strong backtest almost becomes a reason not to buy into a strategy. And if a strategy looks good now simply because it is expensive, that may be an active reason to fear that it will now perform badly. Conversely, it might imply that factors that have done poorly of late – and as the chart shows, value has badly lagged behind the market ever since the financial crisis – are now cheap and worth buying, for those with the intestinal fortitude to do so. Meanwhile it is worth checking whether low-volatility and high-momentum stocks, both still performing well, look over-expensive and due to revert to the mean. 3D’s Response: Are there more opportunistic times to buy factor portfolios like value? Sure, that’s almost axiomatic. Buying value seemed to be the only strategy that worked in 2009 following the steep sell-off during the global financial crisis, but when it looked like large banks like Citigroup (NYSE: C ) and Bank of America (NYSE: BAC ) would go under, it would have required heroic “intestinal fortitude” to bet on value at the height of uncertainty. When a long-term strategy looks especially cheap versus its history, then it will likely have a higher payoff if you believe in the long-term rationale for owning that strategy in the first place. I find it interesting that Research Affiliates is now just commenting on this after an especially tough period for the RAFI indices, notably in emerging markets. Despite de-emphasizing the role of ‘price’ in its construction, RAFI has historically correlated with value-style indices. One rarely hears from value managers to avoid their strategies because the underlying valuation spreads are narrow (and less opportunistic to buy into the strategy). During these moments when valuation spreads were narrow, chances are the prospective investor had been regaled with Morningstar ratings on past performance, sort of like the backtests Research Affiliates is critiquing. I do believe factor (and strategy) timing is difficult, particularly if one uses valuation spreads as part of the allocation process. Please see this article published by Larry Swedroe on ETF.com where he summarizes research questioning the use of valuation as a timing tool for factor selection. However, I would not rule out valuation as a reason to avoid a factor or to opportunistically invest in it; it is a matter of perspective and what other aspects are incorporated into the decision-making. The bottom line is that investment processes incorporating strategic beta ETFs should not bet on one or two factors but should be diversified across a variety of factors so as to minimize the disruption due to valuation conditions. A final issue: risk. Piling into one particular factor is inherently more risky. For Andrew Lo of Massachusetts Institute of Technology, one of the world’s most respected financial theorists, the problem with “smart beta” is that it can easily morph into “dumb sigma” – the Greek letter used for volatility. 3D’s Response: This is awkwardly written. Yes, investing in just one factor is riskier than being diversified across multiple factors. Yet, how does this morph into “dumb sigma?” Many things can lead to “dumb sigma.” Buying equity on margin can be considered “dumb sigma.” “Dumb sigma” just reflects poor portfolio construction and risk control and is not necessarily indicative of strategic beta investing. The main takeaway is that alternative / strategic beta ETFs have given retail investors more options than what has been historically available. These are not a panacea for beating the markets but can serve as cost-effective to gain targeted exposures not directly accessible via traditional market indices. The goal is not to “win” but to build more robust portfolios to achieve long-term investment goals and objectives. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Australia ETFs In Focus On Likely Snap Elections

While the global economy is on a recovery path with solid improvements across most countries, the development in Australia might block the mending road in the coming months. This is especially true given signs of political issues in the country with the Prime Minister Malcolm Turnbull threatening to snap elections. Turnbull has been trying to pass labor reform bills aimed at curbing union corruption in the building and construction industry, but was rejected several times by the Senate. Now, the prime minister has recalled parliament from a break for a special session on April 18 to vote on these ongoing controversial bills. The bills would re-establish the Australian Building and Construction Commission and establish the Registered Organizations Commission that is vital for the country’s economic growth. If the bills are still blocked, he will dissolve both the houses of parliament (Senate and the House of Representatives) and call for early election on July 2. The move would mark the first Australian double dissolutions since 1987, throwing all the 150 lower house seats and 76 senate seats open for vote. The news of double dissolution election came at the time when the latest Newspoll showed that Malcolm Turnbull’s approval rating as prime minister has slipped to the negative territory for the first time, though he remains by far the most preferred prime minister to manage the economy and deliver a tax reform. ETFs in Focus Given heightened political uncertainty over the snap elections, investors may want to take a closer look at the ETFs targeting this nation. iShares MSCI Australia ETF (NYSEARCA: EWA ) This fund is the most popular and liquid ETF tracking the Australian equity market with an AUM of $1.4 billion and average daily volume of more than 3 million shares. It tracks the MSCI Australia Index and holds 73 stocks in its basket with double-digit allocations to the top two firms. Other firms hold less than 6.6% share in the basket. From a sector look, financials dominates the fund’s return at 53.1% followed by materials (12.8%). It charges 47 bps in annual fees and has gained 4.6% so far in the year. It has a Zacks ETF Rank of 3 or “Hold” rating with a Medium risk outlook. iShares Currency Hedged MSCI Australia ETF (NYSEARCA: HAUD ) This ETF targets the Australian equity market without the currency risk. It follows the MSCI Australia 100% Hedged to USD Index and is basically a holding of EWA with currency hedged tacked on. The fund has accumulated $9.7 million in its asset base since its inception in June 2015 and charges 51 bps in annual fees. Volume is paltry as it exchanges less than 7,000 shares on average daily basis. It has lost 1.8% so far this year. First Trust Australia AlphaDEX ETF (NYSEARCA: FAUS ) This fund employs an AlphaDEX methodology and ranks stocks in the space by various growth and value factors, eliminating the bottom-ranked 25% of the stocks. This is easily done by tracking the NASDAQ AlphaDEX Australia Index and the approach results in a basket of 40 stocks that are widely spread out across various components with each security holding less than 4.6% of assets. Here again, financials takes the top spot at 34.2% while the consumer discretionary and materials sectors round of the next two with double-digit exposure each. FAUS is an unpopular and less liquid option with an AUM of only $2.9 million and average daily volume of around 1,000 shares. Expense ratio comes in at 0.80%. The fund has shed 0.8% in the year-to-date time frame and has a Zacks ETF Rank of 3 with a Medium risk outlook. WisdomTree Australia Dividend ETF (NYSEARCA: AUSE ) This fund follows the WisdomTree Australia Dividend Index and offers targeted exposure to high dividend-paying companies in the Australian equity market. It has been able to manage assets of $33.9 million and trades in paltry volume of 4,000 shares a day on average. Expense ratio comes in at 0.58%. Holding 65 stocks in its basket, the product is widely diversified across each component as none of these holds more than 3.43% of assets. Sector-wise, it has a definite tilt toward financials at 22.5%, followed by materials (15.3%), consumer discretionary (14.1%) and industrials (14.0%). The fund has gained 9% so far this year and has a Zacks ETF Rank of 3 with a Medium risk outlook. Original post

Clean Energy Fuels’ (CLNE) CEO Andrew Littlefair on Q4 2015 Results – Earnings Call Transcript

Operator Greetings, and welcome to the Clean Energy Fuels Fourth Quarter and Year End 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I’d now like to turn the conference over to your host Mr. Tony Kritzer, Director of Investor Relations. Go ahead Mr. Kritzer. Tony Kritzer Thank you, operator. Earlier this afternoon, Clean Energy released financial results for the fourth quarter and full year ending December 31, 2015. 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 risks, uncertainties, and assumptions that are difficult to predict. Words of expression reflecting optimism, satisfaction with current prospects, as well as words such as believe, intend, expect, plan, should, anticipate, and similar variations, identify forward-looking statements, but their absence does not mean that the statement is not forward-looking. Such forward-looking statements are not a guarantee of performance, and the Company’s actual results could differ materially from those contained in such statements. Several factors that could cause or contribute to such differences are described in detail in the Risk Factors section of the Clean Energy’s Form 10-K, filed March 3, 2015. 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 excludes certain expenses that the Company’s management does not believe are indicative of the Company’s core business operating results. Non-GAAP financial measures should be considered in addition to results prepared in accordance with GAAP, and should not be considered as a substitute for, or superior to, GAAP results. The directly comparable GAAP information, reasons why management uses non-GAAP information, a definition of non-GAAP EPS and adjusted EBITDA, and a reconciliation between these non-GAAP and GAAP figures is provided in the Company’s press release, which has been furnished to the SEC on Form 8-K today. Participating on today’s call from the Company is President and Chief Executive Officer, Andrew Littlefair; and Chief Financial Officer, Bob Vreeland. And with that, I will turn the call over to Andrew. Andrew Littlefair Thank you, Tony. Good afternoon everyone and thank you for joining us. I’m going to keep my remarks focused on what we feel are the most important takeaways from 2015 and looking forward into 2016. For the fourth quarter, we delivered 78.3 million gallons to our customers. This is an 8% increase over the 72.4 million gallons we delivered during the fourth quarter of 2014. For the full year, we delivered 308.5 million gallons, 16% or 43-million-gallon increase. I think it’s important to remind everyone that despite the global oil price decline and the rippling effects it has caused throughout the energy industry, we’ve continued to grow our delivered volumes in every single quarter. We’re growing in the most challenging energy market in quite some time and our recurring revenue model is intact. We reported fourth quarter revenue of a $119 million which included $31 million of alternative fuel tax credit. For the full year, we reported revenue of $384 million. Revenue was down compared to last year, principally because of three reasons including lower commodity costs. While lower natural gas commodity prices are good for us and for our customers, they do impact our top line revenue. Revenues were also impacted by continued softness in the global compressor business due to lower oil prices and a strong U.S. dollar. And finally, our station construction revenues were down as compared to 2014 because we completed more station upgrade projects and fewer full stations. All total, we completed 67 station projects in 2015. It is important to note that our station construction projects tend to be cyclical between station upgrades versus full stations. And we anticipate construction revenues in 2016 to benefit from an increase of full station projects. We currently have more refuse station construction projects in the pipeline for 2016 than we’ve ever had in our history. We believe our robust construction pipeline is solid indicator that our customers continue to make investments in expanding their fleets and committed to their sustainability goals. As I’ve emphasized on previous earnings calls, natural gas fuelling is the most effective immediate solution a company can take towards achieving greater sustainability. These environmental benefits will be unmatched with the Cummins Westport Low NOx engine, especially when combined with our Redeem renewable fuel. This combination is cleaner than running an electric vehicle that is plugged into the grid. As we announced in early February, Redeem sales more than doubled in 2015 to 15 million gallons and have become an important fuel for customers like UPS, Ryder, Republic Services, and many transit agencies. Another significant point I’d like to make is that beginning in the third quarter of last year, we crossed over into positive adjusted EBITDA. We’re positive again in the fourth quarter with adjusted EBITDA of $32.9 million. Excluding the alternative fuel tax credit, our adjusted EBITDA was positive $1.9 million. Furthermore, we believe that we will continue to trend positively each quarter of 2016. Lastly, I want to provide an update on our capital structure. We finished 2015 with approximately $147 million of cash and investments on the balance sheet. Our highest and most immediate priority is to address the 2016 convertible notes, and we were paid $16 million of those notes with cash earlier this week. We expect to repay the remaining balance with the combination of cash and stock. We have also recently bought back $32.5 million of our 2018 convertible notes. Also, so far in the first quarter, we reduced our convertible debt by $92.5 million. But, I want to emphasize that we already have several incoming sources of cash including positive EBITDA, a credit line based on working capital, the alternative fuel tax credit and proceeds from our at-the-market-stock sale program. Our principal uses of cash this year will be for CapEx, interest expense, the opportunistic buyback of the 2018 convertible notes, and paying the remainder of the cash portion of the 2016 convertible notes. We believe our cash position will be about the same at the end of 2016 as it was at the end of 2015; this, even after addressing the 2016 converts and the portion of the 2018 convertible notes. Our CapEx budget for 2016 is about $25 million, which has been reduced by more than 50% from 2015. This will be a targeted only for projects for key anchor fleet customers. I want to reiterate that our business continues to grow because our largest customers continue to invest in their natural gas fleet operation. And our scale and expertise allows us to be their partner of choice across the country. We also continue to gain new customers across our markets of transit, refuse and trucking. The natural gas fuelling industry although facing current headwinds, will continue to be the most cost effective in environmentally beneficial solution for commercial fleets and is here to stay. The pressure of consumer-facing companies to reduce their carbon footprint and emission levels, only [Technical Difficulty] Operator Ladies and gentlemen, please stand by. Ladies and gentlemen, we do apologize for the inconvenience. Our speaker line has disconnected. Give us one moment, and we’ll get them right back. Sorry about that. Gentlemen, we’re back. Andrew Littlefair Good. Well, sorry everybody. It looked like our call dropped. I was just wrapping my remarks. Let me just say that our focus for 2016 is very straight forward, deleveraging the balance sheet; conserving cash; and growing volumes. And with that I’ll turn the call over to Bob. Bob Vreeland Thank you, Andrew and good afternoon to everyone. Overall we had a good fourth quarter with 8% volume growth from a year ago and positive adjusted EBITDA. As Andrew mentioned, annual volumes grew by 43 million gallons or 16.4%. We’ve seen growth in all of our sectors including refuse, transit, trucking and industrial. On our renewable natural gas, we saw decline compared to 2014 due to the sale of our Dallas biomethane plant at the end of 2014. Our revenues for the fourth quarter of 2015 and for the year were less than the same periods in 2014, which is consistent with what we have seen during the first three quarters of 2015. However, it’s important to note that we have improved our adjusted EBITDA in 2015, despite the lower revenue, in part as a result of lower commodity costs, improved operating results at our compression business, lower SG&A spending, together with gross profit margin benefits from our volume growth. Our gross profit margin per gasoline gallon equivalent for the fourth quarter including our low carbon fuel standards credits or LCFS credits was $0.28 per gallon, which compares to $0.28 per gallon in the fourth quarter of 2014. For clarification, we have included the LCFS credits in our volume related revenue and gross profit margin per gallon similar to how we include our RIN credits in our volume related revenue and margin per gallon, and will continue this approach on a go forward basis. While we have seen some pressure on fuel margins from this low oil and diesel price environment, the environmental credits or RINs in the LCFS have benefited our gross profit margin per gallon in 2015. This is testament to the fact that we have both economics associated with fuelling natural gas and additional economic benefits from the environmental attributes of our product offering. Clean Energy Compression Corp. also saw improvements in gross margin as we continue to move in to a standardized product offering. Our SG&A spending of $26.6 million in the fourth quarter of 2015 was 12% lower than a year ago and 4% lower than the third quarter. Throughout 2015, we took appropriate actions on SG&A spending, given the lower price environment and have seen a reduction each quarter. On a year-over-year basis, we have reduced SG&A by approximately $13 million or 10%. And compared to 2013, SG&A has been reduced 18% or $24 million while volumes have increased 44%. Also because we have been successful in sourcing LNG from 27 different locations across the U.S. and since we are closely monitoring and reducing our CapEx, we cancelled our $200 million credit facility with GE, which we put in place three years ago, specifically to finance the construction of two additional LNG plants. Since we never initiated construction of the LNG plants, this facility was undrawn. However, the cancellation of the credit facility meant we could cancel $4 million issued but on debts and warrants. This had the effect of the $54.9 million non-cash interest charge of Q4 and saved us around $1 million annually in cash from not having to pay standby commitment fees. Our adjusted EBITDA for fourth quarter of 2015 was $32.9 million compared to the $37.2 million in 2014, although from a comparability standpoint, 2014 included a $12 million gain from the sale of our Dallas biomethane plant. Our adjusted EBITDA has improved each quarter in 2015, crossing over the positive adjusted EBITDA in Q3 and again in Q4. We see this trend continuing into 2016. For the year, adjusted EBITDA was $27.8 million compared to $23.7 million in 2014. Keep in mind, 2014 included the $12 million gain. Regarding the alternative fuel tax credit what we refer to as VETC, we recorded $31 million of VETC revenue in December 2015, representing VETC for the full year of 2015. On a side note, we collected the $31 million last week. Going forward, in 2016, we will recognize VETC on a quarterly basis, since the tax credit is in effect through the end of 2016. As Andrew mentioned, we have reduced our convertible note debt by $92.5 million thus far in the first quarter of 2016. We utilized existing cash and established a $50 million line of credit, which has a significantly lower interest rate than the convertible debt and is collateralized by a portion of our short-term investments. With that operator, we’ll open the call for questions. Question-and-Answer Session Operator Thank you, gentlemen. At this time, will be conduction a question-and-answer session. [Operator Instructions] Our first question comes from the line of Rob Brown from Lake Street Capital Markets. Please proceed with your question. Rob Brown On your gallon volume growth, you had nice growth in 2015. What sort of you’re thinking on 2016, should you be able to get double-digit volume growth in 2016 as well? Andrew Littlefair Rob, we probably don’t typically quote a number on that going forward in giving guidance. But one of the strengths that we have is our recurring model. So, we’re seeing very good continuation of the strength of our refuse business and we’ve actually had some good wins in transit. And our transit customers continue to take transit buses. So, we’ll have increase in volume. I’m not going to go out on a limb right and give you exactly if it’s going to be double digits or not. But we have built in our budget a good volume growth. And I don’t know that it will hit — for years and years, we are in the 20% range, Rob, or down a little bit on last year, could be a little bit challenge compared to 2015. But I think it will be in that neighborhood because our existing customers continue to take more vehicles. Rob Brown And then, you talked about a new contract pipeline — sorry, new contraction pipeline being quite large. Can you talk sort of how many units or what industries they’re for, and maybe scope that a little bit? Andrew Littlefair We kind of have two buckets of contraction, some of our own account. And when you look at that CapEx, you have to take out — $25 million, you have take out a portion of that for some trailers that will happen at our Natural Gas Advantage subsidiary. The remainder or the majority of it’s for new stations. And those are for our account; those are station that we own. And you can figure, those stations range around $1.5 million apiece or so. Some of that money in that $25 million will go to open up our truck-stop stations, as we make some of those; we had some CNG to it and things like that. But the bulk of our construction, which should be on the par, I would say in terms of just building stations, if you think of that that way, we did, as I said in my remarks, 57 or so last year. We’ll be in that almost identical, if not up a few from that. Most of those stations will be for our customers and we sell those stations for those customers. And majority of that will be worked and we’ll do for our refuse customers. We really have seen our refuse customers across the board continue to add vehicles, add stations. As I mentioned in my prepared remarks, we kind of see the construction business ebb and flow, Republic is good example and so is Waste. But, Republic will build stations for Republic in one given year. The next year, they add another 10 or so percent of vehicles at those sites. And so, we will necessarily build more stations, will increase the size of those stations. And then the next year we typically add more stations and so goes. So, the majority of the stations that we’ll see in our construction business will go for refuse. And then we will have pretty good business this year on the transit side, some of which we announced yesterday. Rob Brown And then last question on your balance sheet. I think you said you paid down your — good chunk of your convert in the first quarter here. What’s sort of your plan? I guess it’s due in August. Do you plan to pay — kind of what’s the timing on that rest of that payment, and what’s your plan there? Andrew Littlefair What we said, Rob, is we would take care of it, before it’s due, right? We have several months. And so, it’s really a balance of using cash and stock. We would rather — to the extent, we are going to use stock, we’d like it to be at a higher price and because it therefore will be less dilutive to the Company and its shareholders. And so we will keep an eye on that. We are in very close communication, as you would imagine with those noteholders, having just sent them something $60 million. They understand what we are trying to do, as they are working with us, I think in a very cooperative fashion. And because there wasn’t really anything in those notes that would allow us to prepay. So, they are working with us. And we would like to use as much cash as possible. And so I would say, just watch us over the next several months, as we look to what the oil price does and other things. In the sort of in the summer here, we’ll begin to take care of, clean it all up. Operator Our next question comes from the line of Eric Stine from Craig Hallum. Please proceed with your question. Eric Stine Maybe just [ph] an overall market picture, I mean clearly the people on the fence are probably not doing a whole lot. But just curious, are you seeing any changes to the plans as some of the first movers, any changes in behavior from the shippers due to low oil prices? Andrew Littlefair Eric, you have it exactly the way I talk about it. I mean if you kind of break our business down and you have those customers that have been with us a long time, and I don’t see that there is — has any — hasn’t been really any chink in the armor. Those refuse customers, I mean there hasn’t been a one that has — that decided to go back to diesel. And really that’s been the case even in our over-the-road trucking customers. UPS is continuing to move forward on big deployment of natural gas trucks. But certainly, our transit customers and our refuse guys are moving forward. And I really feel like the economics are still there. We have to remind for the people on the call, let’s remember, we still have an economic proposition, not as good as it was a year ago. But we are still saving versus the other fuel. And Eric, the other I think important point is with all of this going on, with the climate change and talks in Paris, and what you see all the time is sustainability is and continues to be really important thing that these consumer companies, what we call the shippers, they are very mindful of that. And the new rule’s being talked about in California going forward, starting the next couple of years. The introduction of low NOx engines has really kind of raised the bar in terms of NOx emissions. And so, look, this isn’t lost. I spoke to the executive leadership of the American Trucking Association out here in California a month ago, and they are very mindful of fact that the bar continues to be raised in terms of them being cleaner and less carbon. So, right now, while we’re a little pressed on the economics, the payouts gone from maybe at $1 — maybe one year payback little longer to — now it’s closer to two years, we still have an economic offering. And our shipper friends are still putting pressure on our contracted carriers to look for the cleanest option. And so, you’re right. Those that were on the fence this — $1.60 diesel in the Southeast, this has been very challenging, and I understand why they continue to watch. And those people that have been invested continue to move forward with the program. Eric Stine And maybe just sticking with the emissions angle, there’s been a lot of chatter lately about pairing Redeem with the low NOx 8.9-liter that I believe is coming out next month. Just curious, I mean are there any fleet opportunities you see out there that are weighting on that engine? And then maybe any government programs whether it’s Prop 1B funding or others that fit into that? Andrew Littlefair It’s a good point, Eric. I think we really have captured fuels. In fact there was a conference, industry conference, pretty well attended out here at Long Beach couple of weeks ago where it was called game changer, and it was the introduction of this low NOx engine. And remember this engine is 90% less NOx and you compare it — I mean sorry you combine it with our Redeem product and you’re 90% less carbon. That’s really powerful. In my remarks, I said it’s even — it’s cleaner than electric vehicle. And it’s substantially cleaner than anything that’s on the books right now. So, we see that as very important thing in the future. It won’t come to the 12-liter for another couple of years in 2018. You are exactly right, that engine is now — if you are ready to order one of those engines, you go to the OEMs and that process is kind of in the works, as we speak. I think you are going to see some efforts to put these engines with that fuel in the port of LA as they continue to work on cleaning up the environment down there. There’s talk of new standards in California where a portion of renewable natural gas will be required, going forward. So, yes, I really think that for natural gas the renewable fuel is going to be an important piece, as well as this engine. I’m excited about it because it really ups the game, ups the ante for all the other competing alternative fuels. I mean the electrics can’t there on heavy duty on cost basis, and other fuels are just really miles behind. So, when we get a little help on the oil price, you’re going to be able to see really powerful economics again and this environmental advantage with the low NOx and with the low carbon fuel. Eric Stine Maybe just last one from me, just on the SG&A, just any thoughts on additional levers there; good to see that come down again, just wondering how we should think about that trending in 2016? Bob Vreeland Hi, Eric; it’s Bob. Trending, there’s room there. I don’t know that it’ll reduce every single quarter but there’s more room to — that that will trend a little bit down, probably for the whole year. Andrew Littlefair We’ve made additional trim, additional reduction. Keep in mind, we’re growing. And so there’s a limit here. I mean, as Bob mentioned for the last couple of years, we’ve grown 40% on volume or so and we’ve reduced our SG&A by 18% or whatever it is. And we’re continuing to cut this year. We’re beginning to get to the point where it’s — we’re getting kind of close to I think being at about the right level on the SG&A spending. So, I guess if you look at it going forward, if you’re doing some modeling, you’re beginning to get it about I think where you could kind of level it off, at this level. We may see it come down a little bit more. Bob Vreeland Right. And that’s just because some of the actions that we’ve taken. You haven’t seen a full year in ‘15, and so it’s not so much about taking more actions, it’s about kind of feeling the effects of what we’ve already done for a full year. But that ends up being a little bit less than say, if you were to go in and start taking some other actions. Operator Our next question comes from the line of Ian Scime with Highbridge Capital. Please proceed with your question. Ian Scime This is really just a housekeeping item. So, first off, we’re really encouraged to see the proactive measures that you guys are taking to address the balance sheet. So just a quick question on VETC. Additional $31 million that you guys got came in after quarter-end, correct? So, if I think about your pro forma cash before the debt repurchases, it’s actually closer to $180 million. Is that correct? Bob Vreeland Yes, we received that here in the last week. Ian Scime And then going forward, it’s on a quarterly basis, correct? Bob Vreeland Yes. And there is a filing piece. So, we’ll recognize it in our numbers for sure. The collection then is a little bit depending upon the U.S. government. Operator Our next question comes from the line of Pavel Molchanov from Raymond James. Please proceed with your question. Pavel Molchanov First, kind of a small housekeeping follow-up on the previous question. What was operating cash flow in Q4? It was still negative because you hadn’t collected the VETC, is that right? Bob Vreeland Yes. It was about negative 11 in Q4. Pavel Molchanov Okay, got it. Bob Vreeland So, because we were year-to-date about negative 1, and we ended 2015 at negative 12. Pavel Molchanov Okay, perfect. And then little more broadly. So, you guys have had some PR about supplying LNG fuel ships on the West Coast. There was a deal signed couple of weeks ago between Shell and Maersk to develop the LNG marine fuel market. Is that still kind of an early stage opportunity or are you actually seeing some more substance to that addressable market? Andrew Littlefair I think it’s still early. But, as I think you pointed out, it seems to continue to — we keep seeing twins pop up here and there. I think there has been a few other ship announcements on both coasts. It seems like there is a trend there but it’s slow, right? You’ve got to repower these ships, it takes time and drydock and these engines, it seems to me slow. So, I don’t think you are going to see it hockey stick here but it seems like there is more happening all the time on that front. Pavel Molchanov Okay. Is there any hope for LNG volumes because it seems like they’re on a continual downward trend for you guys? Bob Vreeland They’re a little flat, yes. but — and I would say there is hope. Yes, absolutely because… Andrew Littlefair Yes, I think so. I think you are going to see — our view is that as the adoption rate picks up — I mean it’s going to be essentially flat I think on the heavy duty trucking side. We saw — LNG was flat mainly, the trucking increased actually but it was flat because of the oil patch and where we’re selling LNG and the oil patch. So, last year that part of the business, the stationary part was down. I think that over a longer period of time, and leaving the oil patch aside and have small plants and some other things that we’ve done is that we still believe, and I know you and I have disagreed over time on this but we see that the LNG will be viable in the regular part of the business. It’s been successful. Our Raven friends who have just added more trucks here that we’ve released yesterday and we have some other customers that are doing the same. So, I think as we kind of get by this environment where it’s been relatively flat, where you see the CNG versus LNG split got 70-30 or so, I still think there is plenty of room for the LNG. So, I think and over time, as this spreads and goes into more fleets, gets a little deeper into the country and it becomes the more sleeper cast, [ph] more a regular route, you will see LNG take a good care of that market because of the advantages that it has range and weight and another things. Operator There are no further questions at this time. I’d like to turn the conference back over to Andrew Littlefair for any closing comments. Andrew Littlefair Good. Thank you, operator. And thank you all for dialing in this afternoon. We look forward to updating you all on our progress next quarter. Bye-bye. Thank you. Operator Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your time and participation. You may disconnect your lines at this time. 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