World Kinect Corp (WKC) 2003 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the World Fuel Services Corp, first quarter fiscal 2003 results conference call. During the presentation all participants will be in a listen-only mode and afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the 1, followed by the 4 on your telephone. As a reminder, this conference is being recorded, Thursday, May 01, 2003. I would now like to turn the conference over to Mr. Michael Mason, with Allen and Caron. Please go ahead, Mr. Mason.

Thank you. Good morning and welcome to World Fuel Services Corporation results conference call for the first quarter ended March 31, 2003. As mentioned by the operator, I’m Mike Mason, of Allen and Caron Investor Relations. Before we start this morning’s call, there are a couple of times I’d like to cover. First, this conference call is being taped. Second, many of you should have received a copy of the press release announcing the company’s results for its first quarter, ended March 31, 2003. It was released this morning at 8:00 AM Eastern. If any of you would like a copy of the call or you did not receive a copy of the press release, please call the New York City office of Allen and Caron, at 212-691-8087. We will send you a copy of the CD as soon as it is available, or if you need a copy of the press release, we will email it to you right away. You may also access a replay of the conference call by calling 800-633-8284, using access code 21139955. International callers wishing to access the replay should dial 402-977-9140, and use the same access code. Also this call is being broadcast live over the internet, at www.firstcallevents.com as well as on the company’s website, at www.wfscorps.com. Both versions of the replay will be available for 10 days, through May the 11th, shortly after the end of the call.

Additionally, I’ve been asked to make the following statement. With the exception of historical information, this call includes forward-looking statements that involve risks and uncertainties, including but not limited to, quarterly fluctuations in results, the management of growth, fluctuations in world oil prices or foreign currency, major changes in political, economic, regulatory or environmental conditions, the loss of key customers, suppliers or key members of senior management, uninsured losses, competition, credit risks associated with accounts and notes receivable, and other risks, detailed from time-to-time in the company’s Securities and Exchange Commission filings. Actual results may differ materially from any forward-looking statements set forth herein. With us this morning is Paul Stebbins, Chairman and CEO. Paul will provide an opening statement addressing the company’s progress, and then the call will move into the Q and A. I would now like to turn the call over to Paul. Good morning, Paul.

Morning, and thank you, Michael. Good morning, and thank you for joining us today. With me are Michael Kasbar, President and Chief Operating Officer; Bob Tocci, President of our Marine segment; Michael Clementi, President of our Aviation segment; and Frank Shea, Chief Financial Officer. This morning we announced earnings of $5.3 million, or 48 cents per diluted share for the first quarter of fiscal 2003. We are very pleased with this result, which represents an 18 percent increase in net income over the comparable quarter a year ago. Revenues and gross profit increased 87 percent, and 29 percent respectively, year-over-year. And our cash position remains strong at $50 million. Our days sales outstanding, a key indicator of the quality of our receivables, is at a record low of 26 days. Our performance has exceeded market expectations in a difficult operating environment and we believe it sets the pace for the balance of the year. Frank will deliver a detailed review of the financials in just a moment.

But first I would like to make a few comments on our business and our plans for the balance of this year. As all of you know, the current operating environment is fraught with risk and uncertainty. The market is still skittish and the economy has yet to demonstrate a durable rebound. The shipping industry is just now recovering from a terrible year, and the aviation industry is under siege from the impact of war and SARS and the challenge of radical financial restructuring. Our nation has been at war and faces the daunting task of creating stability in a region more prone to chaos than it is to pluralism.

In spite of, and perhaps, because of all of these things, our company has thrived and is on track for a good year. What has enabled us to prosper in these difficult times is a combination of factors. The first is great people and a highly motivated management team. Where there is vision and the ability to execute, there is the opportunity for success. We have fostered innovation, encouraged people to take risks, and created a culture of trust, which promotes the sharing of ideas and celebrates the adoption of best practices. Our strong corporate culture continues to be a key driver of success, and represents a distinct competitive advantage in the market.

Second is adaptability. Our efforts to expand and diversify our aviation business model has enabled us to prosper and grow, as our global service offering becomes increasingly valuable to an industry challenged by economic upheaval and strong pressure to reduce cost and shed non-core functions. Third is patience. As anticipated and discussed in our last conference call, our marine segment results recovered in the first quarter. After a year of hard times, a rebound in the shipping market contributed to improved performance in the quarter. We have found that sticking to our business strategy will yield solid earnings performance in both segments and created a strong foundation for future growth.

Looking ahead, we will continue to pursue our strategy of building relationships with companies we regard as best in class and their particular areas of the market. Over the last year, this approach has proven very successful in both our marine and aviation businesses, and we fully expect to expand our efforts in this regard over the coming year. Our alliance with AP Moller, the world’s largest shipping fleet, validated the power of our full outsource purchasing model and has generated significant interest from some of the world’s most respected shipping companies, looking for specialized services on a global basis.

Our alliance with Jet Blue, the country’s most successful new low-cost airline, led to contracts with Midwest Express and America West. Last week, Jet Blue announced the purchase of 60 new aircraft. Our alliance with Boeing Jefferson division has added over 250 new customers to our corporate fueling portfolio. The success of this initiative has also led to active collaboration between Baseops, our flight services division, based in Houston, and Jefferson’s operation, based in California. Baseops is ordering more Jefferson flight plans and utilizing their global agency network to expand our business in this important market.

Our PAFCO alliance with signature flight support, has improved our supplies position throughout their network of FBOs and rationalized our cost structure on ground handling and interplane fees nationwide. We are now exploring a broader collaboration in the international arena. As we look forward, we are looking to create similar, best in class alliances in other parts of the market, such as fractional ownership fleets, cargo carriers, and global passenger carriers.

While these discussions tend to focus on those aspects of our business, which reflect growth on the purchasing side of the market, it is also important to comment on our continuing efforts to improve our supply partnerships. We view our suppliers as key customers, and have worked hard to build increasingly strategic alliances with major, state owned, and independent oil companies across the globe. These oil companies are under significant pressure to generate high returns on capital, and their position in the downstream market is changing. Our strong balance sheet and global market presence, makes World Fuel and ideal partner for oil companies looking to minimize risk and reduce their cost of marketing marine and aviation fuel. This trend is expected to continue and we are well positioned, going forward, to be the partner of choice for the global supply community.

The rest of this year should prove both challenging and exciting for World Fuel. We are proud of the fact that we have demonstrated the ability to deliver solid results in a difficult market. Through persistence, aggressive marketing, and continued focus on our core competence, we have established a global footprint for our business, which is both durable and growing. By being the leader in adopting best practices in the area of corporate governance, and continuing to invest in top talent in technology, we have strengthened our company and marginalized the competitive landscape. We see opportunities ahead to grow organically, as well as through acquisitions and we will continue to pursue both strategies, going forward.

On the investor relations front, we have continued to expand our shareholding base, both domestically as well as in Europe, and we are committed to further initiative in this area. We would like to thank our current shareholders, who have supported us while we worked to transform the company and expand our position in the international market. Your confidence in our vision for the future is appreciated. We are happy about the results for the quarter and look forward to continued success for the rest of the year. I will now turn the floor over to Frank Shea, to review the financials in detail.

Okay. Let’s go through the numbers, starting with the business results again, at the top of the P and L, with revenues. Our total revenues for the first quarter of 2003 were $658 million, versus only $351 million in the first quarter of 2002, which represents an increase of 87 percent, year-on-year. Marine group revenues were $397 million, an increase of $140 million, or 55 percent, compared to Q1 2002. However, this increase is solely due to higher marine fuel prices, which on average, increased by 68 percent. Our unit volume of marine fuel sold decreased 8 percent, to 1.9 million metric tons, while our total unit volume of marine fuel reselling and brokering business activity decreased by 13 percent, to 3.8 million metric tons.

For the quarter just ended, our fuel reselling activities, compared to our brokering activities, increased to 49 percent of total marine business activity, up from 46 percent in the same quarter a year ago. In our aviation services segment, revenues totaled $261 million for the first quarter of 2003, an increase of $166 million, compared to just $94 million of revenues in the first quarter of 2002. This very substantial revenue increase was due to more than doubling the number of gallons of aviation fuel sold, coupled with a 28 percent increase in the average price of that fuel. In fact, we sold fully 228 million gallons during the quarter just ended, compared to only 105 million gallons in Q1 2002. This large increase in volume is the result of new commercial and government business, as well as increases in both our bulk business activities and in our growing fuel management business.

So then, just as more ore is needed to make metal, so is our gross profit the result of much revenue. Our gross profit for the first quarter of 2003 was $27.3 million, an increase of $6.2 million, or 29 percent, compared to the first quarter of 2002. In our marine segment, gross profit increased 39 percent, to $14.2 million, compared to quarter one 2002. In our aviation group, gross profit increased 20 percent, to $13.1 million, compared to the previous year’s first quarter. The gross profit margin for the first quarter of 2003, was 4.2 percent, versus 6.0 percent in the same quarter of 2002. Marine’s gross profit margin of 3.6 percent in the quarter just ended was relatively consistent with the gross profit margin for Q1 2002. In fact, our gross margin in the quarter just ended, showed improvements over the margins for the previous three quarters, indicating that our gross profit margin is returning to normal levels. However, in aviation, the gross profit margin decreased to 5 percent in the first quarter of 2003, as compared to 11.6 percent the year earlier. Put that in dollars and cents terms, our gross profit per gallon, the 5.8 cents for the quarter just ended, is fully 4.6 cents lower than the figure for the last year’s first quarter. This big decrease in gross profit margin was due to big increases in our volume of lower margin businesses, namely our bulk sales, and new last year, fuel management business.

Moving on, operating expenses for quarter one of 2003 were $20.4 million, an increase of $5.6 million, compared to the same quarter in 2002. The increase in operating expenses was due to increases in all three major components of operating expenses; salaries and wages, our position for bad debts, and other operating expenses. The major factors causing the increase in salaries and wages were new hires related to business expansion, the front-end cost of staff to affect productivity and efficiency gains in the future, and increased the incentive compensation associated with our higher gross profit levels. The increase in the provision for bad debt, primarily resulted from one international airline, and in the end, an addition to our general allowance for bad debt in the marine segment. The increases in other operating expenses were also primarily related to business expansion and organizational efficiency.

Continuing our review, down to P and L, we come to income from operations, which for quarter one, 2003, was $6.9 million, an increase of $535,000, or 8 percent, over the same quarter of 2002. The marine segment earned $4.6 million in income from operations in the quarter just ended, an increase of $928,000, or 25 percent, compared to quarter one 2002. Our aviation segments income from operations for this year’s first quarter was $5 million, an increase of $263,000, or 6 percent over the comparable period in 2002.

This is a good time to take note of segment ROA ratio. The operating return on marine segment assets for the quarter just ended was 10 percent, unchanged from the first quarter of 2002. Whereas in our aviation segment, the operating return on assets for the quarter just ended was 17 percent, versus 28 percent in quarter one, ’02. The next stop in our P and L review is net non-operating expense, which for the first quarter of 2003, totaled $253,000, as compared to net non-operating income of $104,000 in the same quarter a year earlier. The negative turn-around in net expenses for the quarter just ended was primarily due to an increase in net foreign exchange losses in Mexico, partially offset by an increase in our equity earnings in PAFCO. These Mexican FX losses, for which our pricing on these transactions fully compensates us, primarily stem from mismatches between US dollar receivables and Mexican peso payables.

Regarding taxes, the company’s effective tax rate for the first quarter of 2003 was 21 percent, versus 31 percent for the first quarter of 2002. This decrease reflects lower statutory tax rates enjoyed by some of our foreign subsidiaries, as well as proportionately big increases in operating income in low tax rate jurisdictions. Finally, our financial ore is fully processed and we can now get to the gold. Our net income after taxes, and our diluted earnings per share, for the quarter just ended, were $5.3 million, and 48 cents respectively, as compared to the net income for the first quarter of 2002 of $4.5 million, and diluted earnings per share of 42 cents.

Let’s now review a few ratios. For the first quarter of 2003, our ROE, that is, return on equity, and ROA, return on assets, were 16 percent and 7 percent respectively. As a comparison, during the same quarter last year, our ROE was also 16 percent and our ROA was 8 percent. Now let us move our review to the company’s financial position, after all that profitable P and L activity just discussed, specifically our balance sheet as of March 31, 2003. Again, starting at the top, our cash position was $50 million, versus $58 million on December 31, 2002. Usage of cash during the first quarter of 2003, included cash used in operating activities of $20.8 million, $1.5 million of payments on the principal portion of prior year’s acquisition notes, $797,000 for dividends, and $994,000 for capital expenditures. These outflows were partially offset by inflows of $166,000 provided by employees’ exercise of stock options, and $16 million of net borrowings under our bank revolving credit facility.

At quarter end on March 31, 2003, working capital totaled $102 million, and total assets were $321 million. As regards our most important asset, gross receivables, they increased from $188 million at year-end 2002, to $195 million at the end of the quarter just completed. This increase in gross receivables was due to higher average fuel prices in both marine and aviation fuel markets, and to increased sales volume in our aviation segment. Our allowance for doubtful accounts also increased somewhat from our previous fiscal year-end, bye $686,000, to $11.8 million. During quarter one 2003, we provisioned $2.7 million and actually wrote off receivables totaling $2 million.

Let us take note, right here, of our most important asset quality ratio; our consolidated days of sales outstanding, or DSOs. At the end of the quarter just ended, DSOs were just 26 days, which compares well to 32 days for the same date a year ago, and 29 days at December 31st, 2002. As for the so-called, other side of the balance sheet, regarding liabilities in particular, our debt increased by $14.5 million from our previous fiscal year end, due mostly to net borrowings of $16 million under our revolving credit facility, offset by principle repayments of $1.5 million on prior year’s acquisition notes.

Finally, at quarter end, consolidated shareholder’s equity amounted to $132.5 million, an increase of $4.8 million from our previous fiscal year end. Thank you for staying with me during this inevitably dry, but hopefully clear, overview of our Q1 2003 numbers. Now, before we get in to questions and answers, let me first turn the leadership of this teleconference back over to tour Chairman, Paul Stebbins.

Thank you, Frank. I hope that was clear for everyone; the picture of our strategy as well as the financials, and we’d now like to open up for questions and answers.

Thank you, sir. Ladies and gentlemen, if you would like to ask a question at this time, you’ll need to press the 1, followed by the 4 on your telephone, and you’ll hear a three-toned prompt acknowledging your request. If your question has been answered and you’d like to withdraw from the question queue, you’ll need to press the 1, followed by the 3. Once again, ladies and gentlemen, any questions at this time, please press the 1, followed by the 4 on your telephone. Our first question comes from the line of Joe Chumbler, with Stephens Inc. Please go ahead.

Congratulations on a strong quarter. First off, I’d just like to ask about the SARS issue. It’s my understanding it mostly is affecting passenger airlines, but are you seeing any effects of the cargo side?

Sure. I think I’d approach SARS by saying, SARS was a reality to us, most immediately just in terms in our interest in our own human resources. We have personnel, obviously, in Hong Kong, Singapore, Japan, and Korea. And I think our immediate reaction to it was to move as quickly as possible to make sure our own personnel were as safe as possible and that we had set up ways for them to work from home and telecommute and basically, Our first instinct was people first. I would say on the commercial side, we’ve been relatively un-impacted. As you correctly pointed out, Joe, our primary focus has not been on the Trans-Pacific large passenger carriers, on a flag carrier basis. So that did not have any immediate impact on us. On the cargo side, there’s been almost no impact that we can immediately see. I mean, like the rest of the world, we’re cautious. I think some of the carriers, like Cathay Pacific and Singapore Airlines, which are more identified in the public domain as being passenger carriers, also have very robust and active cargo businesses of which we see thriving. They’ve actually had increases in both their markets. So, I think we’re all sort of waiting to see what the ultimate outcome is. It’s hard to tell at this point. It obviously seems to be clearing up in Vietnam and Toronto, but we’ll see what happens in China.

Okay, thanks. Let me jump the marine margins, you had a nice improvement in the quarter. I’m wondering what’s driving that improvement and how sustainable it is, going forward?

Right. I think our sense was, as you will recall from previous calls, when we were operating in a very difficult shipping market, it increased competitive pressure, the ships were not as active, [indecipherable] there was pressure on saving money any way, anybody could, that tended to pressure margins. There’s been a turnaround in all of the major segments of shipping. You’ve seen it in the container market. You’ve seen it in the tanker market. You’ve seen it in the bulk cargo market. That increase in activity and sort of a return to a little bit healthier hue in the color of the marine space, has created more activity and perhaps a little less sensitivity on margin, and we’ve been able to see some corresponding expansion. I think with the activities in the Middle East, perhaps, there was some pick-up there. Also from just the volatility associated with kind of a pre-war climate, I’m not sure that that is in any way sustainable, predictably, going forward. But certainly, compared to historical levels, we saw a return, as we sort of indicated, to more historical levels and we think that that’s durable, going forward.

Okay. And the latter is the majority of the improvement in your opinion?

Most of our activity has been just in increases in the commercial space. Yes, we did benefit from some of the volatility, specifically associated with the pre-war circumstance. But, I think that we have to plan our business in terms of what’s a more normalized commercial market. And we think that there is some durability to some of that margin, going forward. Maybe at not quite the levels we saw for Q1, but not as bad as last year.

Okay. Jumping over to credit quality, I’m wondering, when you look out at the shipping industry, since you’re seeing the improvement, does credit quality appear to be improving as well out there?

Yes. And as you know, historically, our credit concerns have not normally been so associated with the marine space. We’ve got a pretty good historical track record there, like everything else, you know, vigilance is the price of liberty. So you have to be focused on it every day. And it still continues to be an uncertain economic climate, so I wouldn’t suggest that everything’s so rosy that you can’t be vigilant. So, in the marine space again, that historically wasn’t the area that we perceived to have the bulk of the risk. But, I would say that we’re happy to see our customers doing somewhat better. The only other thing that I’d say is in offsetting penalty, is that prices are very high. So, when people are paying high prices, that does put a burden on their cost structure. But, prices are coming down a bit and the real issue, Joe, first, last, and always, is whether the economic recoveries become durable over time.

Okay. And I guess, finally, just a balance sheet question. The increase in long-term debt, can you disclose what the use of the funding was?

The use of the funding was to take advantage of, basically, opportunities to save money in the way we do our operations. So, a lot of that borrowing was used to make prepayments to suppliers, and thereby capture discounts that were attractive, against the cost of interest.

Okay, so will it come back down in future quarters?

Yes, it goes up and down as opportunities present themselves.

Okay. Alright, thanks.

Once again, ladies and gentlemen, as a reminder, if you do have any questions at this time, you’ll need to press the 1, followed by the 4, on your telephone. Mr. Stebbins, I show no further questions at this time, sir. Please go ahead with any closing comments you might have.

Thank you, Rob. That’s probably unprecedented in the history of the company. Thank you all for joining us today. If there are other questions, we are always available to answer them. But in any event, we’re pleased with the quarter. We appreciate your support. And we’ll look forward to speaking to you at the second quarter. Thanks so much.

Ladies and gentlemen, that does conclude your conference call for today. You may now disconnect and thank you for participating.