World Kinect Corp (WKC) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the World Fuel Services fourth quarter and year-end results conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the conference over to Jesse Deal. Please go ahead, sir.

Thank you and good morning. Welcome to World Fuel Services' results conference call for the fourth quarter and year ended December 31st, 2004. As mentioned by Claudine (ph), I am Jesse Deal of Allen & Caron, investor relations. Before we start this morning's call, there are a couple of items I'd like to cover.

Many of you received a copy of the press release announcing the company's results for its fourth quarter and year ended December 31, 2004. It was released this morning at 8 a.m. Eastern and was covered by Dow Jones, also at 8 a.m. Eastern. If you did not receive a copy of the press release, it is posted in the clients section of our website at www.allencaron.com or you may call our office in New York at 212-691-8087 and we will e-mail it to you right away. It is also posted on Yahoo! Finance.

In addition, this call is being recorded. You may access a replay of this call through March 9th by calling 800-633-8284. International callers should dial 402-977-9140 and enter conference ID number 21232937.

In addition, this call is being broadcast live over the Internet through Thomson Financial's First Call Events at www.firstcallevents.com. The Internet replay will also be available shortly after the end of this call through-- and be available through March 31st.

Additionally, I've been asked to make the following statement. With the exception of historical information in this conference call, 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-- world oil prices or foreign currency, major changes in political, economic, regulatory or environmental conditions, the loss of key customers, supplies or key members of senior management, uninsured losses, competition, credit risk 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&A. I'd now like to turn the call over to Paul. Good morning, Paul.

Thanks, Jesse. Good morning and thank you for joining us. With me today are Michael Kasbar, President and COO; Bob Tocci, CFO; and Frank Shea, Chief Risk and Administrative Officer.

This morning we announced record earnings of $7.8 million or 33 cents per diluted share for the fourth quarter of fiscal 2004. This represents a 28 percent increase in net income over the comparable quarter a year prior.

For the year, we produced earnings of $27.5 million or $1.17 per diluted share, which represents a 26 percent increase in net income and a 19.4 percent increase in EPS for the year. The company also achieved record levels of revenue, gross profit and operating income both in the quarter and for the year, with growth of 150 percent, 62 percent and 31 percent, respectively, for the quarter and 112 percent, 27 percent and 31 percent, respectively, for the year.

Our cash position at quarter end remains strong at $64.2 million and our days sales outstanding was 24 days.

2004 was a great year in every area of our business and we are very pleased with the results. Our global team has delivered strong financial performance for our shareholders and made tremendous progress in advancing our business model in every industry segment and in every region of the world. We are excited about the prospects for further growth and we believe we are well positioned for 2005.

In our marine segment, results improved significantly in the fourth quarter, reflecting increased volume and improved margins across all segments of the business. A strong supply position, new account acquisition and a healthy operating environment for the shipping industry all contributed to the strong result.

The commercial integration of Tramp is yielding good results in every market. We have reorganized our global marine management team in an effort to put our key commercial leaders in a position to better drive the overall commercial result. We have stepped up our global marketing and secured a number of new accounts, as well as new volume from existing accounts in the U.S., Europe and the Far East.

Our supply specialization initiative has enabled us to consolidate our purchasing in a number of major markets and strengthen our supply relationships. The shipping industry reported record results in 2004 and the prospects are good for a strong market in the near term.

In 2005, we will be focused on execution and continued improvement in our service offering. Spot and contract purchasing, port arbitrage, forward purchasing, fuel quality control, logistics and operational support all feature in our value proposition to global customers in the supply and purchasing community.

In the aviation segment, 2004 was a year of continued success across the spectrum. We have achieved growth in every segment of the market and every region of the world. Our largest centers of activity, the U.S., UK and Singapore, have all posted strong results and we are pleased to see better than expected results from our smaller satellite offices in Mexico and Russia.

And after eight years of developing our position in China, we opened an office in Beijing March 1. Mai Yung Lee (ph), the director of our newest office, is the former director of fuel procurement for Air China and highly regarded in the international aviation community. We have learned from our marine business that having local representation in China is important to the business model and we are excited about the prospects for growth in this enormous emerging market.

On the services and logistics front, we continue to refine and develop our business model and fuel management and expect growth in this area in 2005. Our supply partnership with Morgan Stanley has grown considerably as they have expanded their supply network and relied on us for retail distribution. Our overall volume has grown as we continue to demonstrate our ability to add value to our supply and purchasing partners in a growing number of key markets.

With the continuing changes in the industry, our supply partners are working with us more closely to aggregate demand, de-risk their portfolios and enhance their global marketing. This has significantly raised our profile with the international purchasing community.

In the most recent ARMBRA (ph) survey of 71 global airlines, World Fuel was ranked the best regional jet fuel marketer in North America. Our team achieved high marks for best staff, best organizational structure, most innovative, best informed and most improved. This public validation of our service offering is a much-deserved tribute to our global team and what they have done to firmly establish World Fuel as a global leader in the fuel services business.

We see tremendous promise in this area, and we have hired Jeff Shafer (ph), formerly of Koch Oil (ph), to develop sales and supply alliances with large fleets. After 28 years at Koch (ph), Jeff (ph) is one of the most recognized and well-respect jet fuel specialists in the industry and we are delighted to have him join us.

One of our most exciting areas of growth has been in the corporate space. We continue to focus on large aircraft and fractional fleets and in 2004 entered into fuel procurement agreements with Centeon Jets (ph) and Delta AirElite. Both programs are off to a great start.

Base ops, our flight services division, had its best year ever and our alliance with Jeppesen has resulted in over 500 new fuel customers. We have achieved global acceptance of our brand and firmly established World Fuel as the leading fuel solutions provider for general aviation.

Looking ahead, we expect continued growth in our core aviation and marine businesses and we are looking to expand our service offering into the land-based diesel and gasoline markets. A small pilot program, launched two years ago, is beginning to show promise as a new area in which to provide our specialized expertise to large distributors, known as jobbers, challenged by the same issues faced by our customers in the marine and aviation industries, including credit, logistics, supply and price/risk management.

Suppliers, who are increasingly focused on the upstream market, and looking to rationalize their participation in the retail market, have welcomed World Fuel into the space. We represent a reliable counter-party with a strong marketing and customer-facing network which can help optimize their distribution program and reduce exposure.

We have established proof of concept in 18 states and will spend 2005 focusing on further developing supply relationships and refining our offering to select customers in key markets. Initial market response to our offering has been quite positive and while the impact of the land initiative on earnings is immaterial at this time, we believe it could become a meaningful contributor over the next few years.

We have also had significant activity on the corporate front this year. Our $100 million revolving credit facility with LaSalle Bank, HSBC, Merrill Lynch, Israeli Discount Bank and Commerce Bank NA, was expanded in September to $150 million and the syndicate now includes JPMorgan Chase.

We are also pleased to report that we are well on our way to completion of the 404 attestation process mandated by Sarbanes-Oxley and expect to file our report, as does PricewaterhouseCoopers, with the 10-K. This has been an expensive, time-consuming process and its completion will be a tribute to a lot of hard work put forth by a global team of unsung heroes who labored behind the scenes to make it a reality. Their dedication and hard work during a challenging process is nothing short of distinctive and we applaud their efforts.

And while the costs of Sarbanes-Oxley were considerable and will continue to be so, going forward, it is our view that the exercise has helped make genuine improvements in our business process across the board. To be meaningful, best practices, transparency and commitment to good process and control must be more than a matter of regulatory compliance and static measurement. They must be an integral part of our corporate culture and animate behavior at every level of the enterprise. For all the costs incurred, both money and distraction, we believe we are a better company today than when we started the process and it has become a competitive differentiator in the market.

Lastly, we are very excited about the recent appointments of Bob Tocci to the role of CFO and Frank Shea to the role of Chief Risk and Administrative Officer. Both these individuals have served this company with uncommon dedication for many years and we could not more pleased to have them leading these critical areas as we position the company for its next phase of growth. Capital structure and upgrading our ERP platform will feature prominently in their planning for the coming year.

2004 was a break-out year across the board for World Fuel. We have further secured the company's strategic position in the market while delivering solid growth in earnings and strong stock performance for our shareholders. In their January 10th issue, we were recognized by “Forbes” magazine as one of the best-managed companies in America and in their March 7th issue “Fortune” magazine included us in their list of America's most-admired companies.

We are proud of what our team has achieved and as we move forward we will continue to focus on solid execution to protect and expand our position into the future. We would like to thank you, our shareholders, for your continued support and we'll now turn the call over to Bob Tocci for a detailed review of the financials. Bob?

Good morning. Revenue for the fourth quarter was $1.8 billion, up $1.1 billion as compared to revenues of $706 million for the same quarter a year ago. Marine segment revenues were $934 million, an increase of $511 million as compared to the same quarter in 2003.

Of this increase, $331 million is due to an increase in the unit volume of fuel sold and the balance, or $180 million, is due to a 41 percent increase in the average price of fuel. The higher unit volume was largely due to the April 2004 addition of the Tramp group of companies.

For the quarter, total marine business activity, measured in metric tons, increased to 5.7 million. Reselling has increased to 66 percent of total business activity as compared to 51 percent a year ago. This favorable change in our business mix is primarily due to the addition of Tramp.

In our aviation segment, revenues totaled $833 million for the fourth quarter of 2004, an increase of $551 million as compared to the same quarter a year ago. Of this increase, $236 million is due to an 86 percent increase in the number of gallons of aviation fuel sold and the balance, or $315 million, is due to a 59 percent increase in the average price of fuel. In fact, we sold over 507 million gallons during the quarter, an increase of 234 million gallons, and was largely due to a new fuel management and commercial business activity.

For the year, revenue of the company more than doubled to $5.6 billion, an increase in absolute terms of $3 billion. In the marine segment, revenues increased by $1.4 billion or 85 percent to $3 billion. Of this increase, the Tramp group of companies provided $877 million. $354 million was due to an increase in the volume of marine fuel resold and the balance, or $154 million, was due to an increase in the price of marine products.

Aviation segment revenues were $2.6 billion for the year, an increase of $1.6 billion as compared to last year. Of this increase, $941 million was due to a 97 percent increase in the volume of products sold and $649 million was due to a 29 percent increase in the average price per gallon.

Our gross profit for the fourth quarter of 2004 was $37.9 million, an increase of $14.5 million or 62 percent compared to the same quarter a year ago. For the year, the company's gross profit was $128.3 million, an increase of $27.6 million or 27 percent.

For the fourth quarter of 2004, our marine segment gross profit increased by $8.5 million to $18.5 million compared to the same quarter a year ago. This increase is due to a significant improvement in the gross profit per metric tone of fuel sold and increase in sales volume, largely associated with Tramp.

In aviation, the gross profit increased by $6 million to $19.4 million for the fourth quarter of 2004 as compared to the same quarter last year. The increase was due to growth in fuel sold to our commercial aviation fuel customers.

The company's gross profit margin for the fourth quarter of 2004 was 2.1 percent as compared to 3.3 percent in 2003. The gross profit margin for 2004 was 2.3 percent versus 3.8 percent for last year.

Both segments' gross profit margin declined in the fourth quarter of 2004. Marine declined to 2 percent from the 2.4 percent achieved in the same quarter a year ago and the aviation gross profit margin decreased to 2.3 percent, down from the 4.8 percent achieved in the same quarter a year prior. The decline in gross margin percentage for the company in each business segment is primarily due to the fact that in 2004 the sales price of products sold rose more rapidly than our gross profit per unit. Also contributing to the decrease in the aviation gross margin was an increase in high-volume, low-gross-profit business with major commercial airlines.

Our operating expenses for the fourth quarter of 2004 were $28.6 million as compared to $16.3 million in the same quarter a year ago. Of the total increase of $12.3 million, $7.6 million was due to salaries and wages, $719,000 in provision for bad debts, and $4 million in other operating expenses.

For the year, total operating expenses were $92.9 million as compared to $73.7 million for 2003. Of the $19.2 million increase in total operating expenses, $13 million was due to higher salaries and wages and $8.1 million, increase in other operating expenses. Partially offsetting was a $1.9 million decrease in the provision for bad debts.

The increased operating expenses for both the quarter and year were primarily due to the additional operating expenses of Tramp, higher performance-based incentive compensation, new hires and professional fees. It should be noted that the decrease in the provision for bad debts for the year was primarily due to a shift in business in favor high credit quality, high-volume commercial accounts in 2004.

Our income from operations for the fourth quarter of 2004 was $9.3 million, an increase of $2.2 million or 31 percent as compared to the same quarter a year ago. For the year, our income from operations was $35.4 million, an increase of $8.5 million or 31 percent as compared to 2003.

In absolute terms, the marine segment contributed 47 percent of total operating income for the quarter and the balance, or 53 percent, was provided by aviation. The marine segment earned $7 million in income from operations for the fourth quarter of 2004, an increase of $2.8 million or 67 percent versus the same quarter a year ago. In aviation, income from operations for the fourth quarter of 2004 was $7.9 million, an increase of $1.9 million or 31 percent over the comparable quarter in 2003. The improvement in both segments' operating income for the quarter reflects the substantial growth in our gross profit, partially offset by higher operating expenses necessary to support higher levels of business activity.

The operating return on segment assets for the fourth quarter of 2004 was 7 percent in marine and 14 percent in aviation. For the fourth quarter, our operating income provided by our business segments was partially offset by $5.6 million of corporate overhead, an increase of $2.5 million for the same quarter in 2003. The explanations for the increase in corporate overhead are consistent with those explanations provided above for operating expenses.

Non-operating other income for the fourth quarter of 2004 was $27,000 as compared to $316,000 during the same quarter in 2003. This decrease of $289,000 was primarily due to increase interest expense resulting from increased revolving credit facility borrowings.

For the year 2004, we had net operating other expense of $1.4 million as compared to net non-operating other income of $628,000 in 2003. This change was primarily due to a foreign exchange loss recorded in the second quarter of 2004 stemming from a non-fully-hedged sterling position that was not converted into U.S. dollars at the time we acquired Tramp. Also contributing to the change for the year was higher interest expense on the revolving lines of credit.

The company's effective tax rate for the fourth quarter was 17 percent versus 24 percent for the same period in 2003. We provided $1.6 million for income taxes during the fourth quarter of 2004 as compared to $1.8 million for the corresponding quarter a year prior.

For the year, our effective tax rate was 19 percent as compared to 21 percent in 2003. We provided $6.5 million for income taxes during all of 2004 as compared to $5.7 million in 2003. The effective tax rate for both the quarter and year has declined as our mix of earnings has shifted to jurisdictions with a lower tax rate.

Net income for the fourth quarter of 2004 was $7.8 million and diluted earnings per share was 33 cents as compared to $5.6 million and 25 cents for the corresponding period last year. Net income for the year was $27.5 million in 2004 and diluted earnings per share was $1.17 as compared to the $21.9 million and 98 cents in 2003.

Our return on equity was 17 percent for the fourth quarter of 2004 and 16 percent for the year. Our return on assets was 5 percent for both the quarter and the year.

At year end, our cash position was $64 million as compared to $76 million at December 31st, 2003. During the year ended December 31st, 2004, net cash used in operating activities was $28.8 million. Other uses of cash included net a cash payment of $31.8 million for the acquisition of Tramp, $3.4 million dividend payments, $2.1 million in debt repayment and $2.4 million in capital expenditures. Offsetting these uses of cash were $50 million in borrowings under our revolving credit facility and $6.3 million received from the exercise of stock options.

Our gross receivables increased from $203 million at December 31st, 2003, to $404 million at December 31st, 2004. This increase is primarily due the Tramp acquisition and higher business activity in both our marine and aviation businesses.

Our allowance for doubtful accounts increased by $739,000 to $11.3 million. During 2004 we provisioned $4.3 million and wrote off receivables totaling $3.6 million.

Our consolidated days sales outstanding or DSO was 24 days at the end of the fourth quarter as compared to 25 days for the same quarter a year prior.

As of December 31st, 2004, working capital totaled $178 million and total assets were $621 million, whereas at December 31st, 2003, working capital totaled $107 million and total assets were $352 million.

Our total liabilities of $435 million at December 31st, 2004, represented an increase of $231 million as compared to December 31st, 2003. This increase reflects the Tramp acquisition and was primarily due to increases in accounts payable, customer deposits and borrowings under our revolving credit facility.

Also, at December 31st, 2004, our consolidated stockholders' equity amounted to $186 million, an increase of $38 million or 26 percent from the December 31st, 2003, levels.

Thank you for staying with me during this detailed over the fourth quarter and full-year 2004 numbers.

Now, before we go on for the question-and-answer period, let me first turn the leadership of the teleconference back to our Chairman, Paul Stebbins.

Thanks, Bob, that's great. Claudine (ph), if you'd be kind enough to open it up for questions, please?

[OPERATOR INSTRUCTIONS] Joe Chumbler, Stephens, Inc.

Good morning, Paul, and congratulations to you and the entire team on another great year.

Thanks, Joe, we appreciate it.

Let me just start with marine. Volume was a just a little lighter than I anticipated. I'm wondering, did you guys dial back a little bit due to credit risk in the quarter?

No, I don't think so. I think it's just the normal ebb and flow of the business. As you know, our disposition is that the general shipping market right now seems to be fairly robust. The rates, while not quite as white hot as they had been last year are certainly still very strong. You've seen a lot of very good results posted by the public shipping companies, TK, OMI, OSG. All these guys have done well.

So our sense is that it wasn't so much a concern about that. It's just the ebb and flow of where the ships are trading and where we happen to be doing volume. As you know, our marine business is the spot business, so trade patterns do shift and sometimes that can impact volume. But I think that overall we were pleased with the result. We were-- we were happy with the volumes that the Tramp group delivered. We saw good rebound in margins, so we felt overall that our position was very good.

Yes, my next question on the margin, was that-- would you consider that a return to normal levels or an unusually good quarter?

Well, gosh, it's a tough one to give you that with accuracy. I would say some of it is certainly a return to levels that we've seen historically.

As you know, we've commented in the previous calls at the end of Q3 and 2 that we saw a really tough patch at the end of '03 into the first part of '04 where you had very volatile and very high-priced crude, but you had very flat prices in products and it was just a tough market from the point of view of margin. But we saw a little bit of recovery in Q3 and Q4. I would say that some events in Q4 were probably a little bit extraordinary and not repeatable, but overall I think we're feeling good about where the market is. I think we're feeling good about getting back into something that we see as more historical levels and I think that we're feeling good, so far, about where '05 is going.

OK. And just let me switch to aviation real quickly. It looks like you had a little pickup, sequentially, in terms of gross profit. Is that right?

Yes, that's correct.

Is that-- do you feel like you're beginning to execute on the purchasing side or is there something else going on there?

No, we're executing on the purchasing side.

OK. Can you give a little more detail on how far along you think you are in terms of executing on the purchasing side?

Well, I would-- it's hard to give you that with granularity in this particular format, but I would say a couple of things are going on. One, our strategy has been working. The ability to aggregate large consolidated volumes to become-- to drive our self-supply model, to be able to reduce our cost of product at various locations, to achieve better competitive positioning as it pertains to the tendering process out there -- all of those things have been successful. We've seen increases in our core commercial volumes. We've been able to hold on and in some instances improve margin.

So I would say, overall, it's the mix of all of it together, Joe, that's succeeding. As you know, over the last couple of years we've talked about our emerging strategy of how to put all these pieces together -- to become a more efficient buyer, to broaden our footprint, to use the aggregated volume to drive economies and efficiencies. All of that's coming together and I think that we're feeling really good about where the whole aviation business model is right now and certainly we feel that the climate going forward is very positive, as well.

What about volume pickup in '05? Are there opportunities out there for more contracts?

Certainly they are, but, as you know, we've discussed in the past, things-- it depends. The commercial base load business tends to be more incremental and kind of steady incline. The fuel management stuff tends to be large chunks when it hits. It's difficult to predict that now with any accuracy or precision, but certainly we're actively working that market, as I alluded to in the opening statement.

I think that we've done a-- we have-- all the evidence suggests that we've done a very, very good job with the business model that we've constructed and this becomes all the more important in the world of Sarbanes-Oxley and transparency and best practices and good controls and all that. We're certainly-- we think we're developing a model that's got some real appeal to the purchasing community. So, yes, I expect that there will be volumetric growth, but I can't tell you with precision when exactly that will hit.

OK. And finally, Bob, on the balance sheet, I'm just wondering, can you talk about how you manage the balance sheet in an environment of rising prices and rising volume like we had last year?

Certainly. I mean, the most important thing in that regard is recognition that the largest asset that this company has is accounts receivable. So there is all hands on deck in the evaluation of credit and with particular regard to the collection of accounts receivable.

That-- it goes without saying that there is also this attention given to inventories, as well as the amount of credit that we're getting from suppliers. So we're working very hard to improve the cash flow of the business.

It seemed like you funded a lot of the growth with payables and bank debt last year?

That's correct. Obviously, the company had over $27 million in income, net income, which was a partial funder of the overall business activity, but the balance, as you say, was borrowings under the line and the free trade credit that we do get from our suppliers. That is why it is also important to us to strengthen our balance sheet in all areas that we can, including building our equity component of the balance sheet.

[OPERATOR INSTRUCTIONS] Mr. Stebbins, there are no further questions at this time. I'll turn the call back to you.

OK. Well, we appreciate everyone joining us today. We couldn't be more pleased with where World Fuel is today and we see a promising future ahead and the team's done a hell of a job. And I would like to say, again, we appreciate all of your very strong support as shareholders and we look forward to the next call. Thanks so much for being here today.

[OPERATOR INSTRUCTIONS]