World Kinect Corp (WKC) 2012 Q2 法說會逐字稿

At this time, I'd like to welcome everyone to the World Fuel Services 2012 second-quarter earnings call. My name is Jameson, and I will be your event specialist today. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Instructions on how to ask a question will be given at the beginning of the Q&A session.

It is now my pleasure turn the webcast over to Mr. Jason Bewley, Vice President of Corporate Finance.

Good evening, everyone, and welcome to the World Fuel Services second-quarter 2012 conference call. My name is Jason Bewley, I'm the Vice President of Corporate Finance, and I'll be doing the introductions on this evening's call alongside our live slide presentation. This call is also available via webcast. To access this webcast or future webcasts, please visit our website at www.wfscorp.com and click on the website icon. With me on the call today are Michael Kasbar, President and Chief Executive Officer; and Ira Birns, Executive Vice President and Chief Financial Officer. By now, you should have all received a copy of our earnings release. If not, you can access the release on our website.

Before we get started, I'd like to review World Fuel's Safe Harbor Statement. Any statements made or discussed today that do not constitute or are not historical facts, particularly comments regarding World Fuel's future plans and expected performance, are forward-looking statements that are based on assumptions that management believes are reasonable and are subject to a range of uncertainties and risks that could cause World Fuel's actual results to differ materially from the forward-looking information. A summary of some of the risk factors that could cause results to materially differ from our projections can be found on our Form 10-K, for the year ended December 31, 2011 and other reports filed with the Securities and Exchange Commission. We will begin with several minutes of prepared remarks, which will then be followed by a question and answer period.

At this time, I would like to introduce our President and Chief Executive Officer, Michael Kasbar.

Thank you, Jason, and good afternoon, everyone. Today we announced second-quarter net income of $48.6 million or $0.68 per diluted share. We are pleased with these results as they clearly demonstrate the resiliency of our multifaceted business model. As global teams performed well in the quarter, delivering volume growth across all three of our business segments year over year, and posting solid volume growth sequentially in our aviation land segments. While there is continued and significant volatility, uncertainty and generally sluggish demand in the global marketplaces, we remain committed and optimistic on our ability to deliver on our long-term growth strategy.

Our Marine segment performed well given macroeconomic conditions and overall industry weakness. The quality of our portfolio remains strong, and our Marine team remains focused on profitable growth going forward. We believe we are well-positioned to capitalize on improvements in the market, and we continue to be seen and leveraged as a strong and reliable counter party with a full suite of services to help our clients and suppliers go to market. Our land segment posted strong results across the board. Driven by organic growth from our core branded and unbranded distribution businesses, our wholesale and rail business, as well as exceptionally strong performance in our crude oil marketing joint venture.

Our crude logistics and marketing business is an excellent example of how we have capitalized on adjacencies coming from our core reselling activities. The organic growth we have seen in this segment is a testament to our entrepreneurial spirit of our dedicated team. Over all, we are pleased with the progress we have made in our land segment as we look to continue to invest in both organic and strategic investment initiatives. In our aviation segment, our core reselling business posted strong volume, and we saw fueling activity pick up in Afghanistan after securing alternative northern routes into the country. The core aviation business activity remains solid, and our diversified offerings in our general aviation business continue to grow.

The foundations of our business remain profitable, and we continue to believe in our strategy and long-term growth plans. We have a community of global professionals dedicated to growing our business on a daily basis. Our core competencies of risk management, local logistics and global reach, combined with a solid balance sheet, remains a key differentiator for us in these tumultuous markets. We continue to evaluate a growing acquisition pipeline, but will continue to look for and execute on organic growth opportunities. W

e thank you for your continued support, and I would now like to turn the call over to Ira for our financial review.

Thank you, Mike, and good evening, everybody. Starting with revenue, consolidated revenue for the second quarter was $9.6 billion, up 2% sequentially and up 11% compared to the second quarter of last year. The year-over-year change in revenue was impacted the 10% increase in volume across our businesses, offset by the decrease in crude oil prices, which declined to an average of $93 per barrel in the second quarter, compared to $101 a barrel last quarter and $102 in the second quarter of last year. Our Marine segment revenues were $3.8 billion, down $137 million or 4% sequentially, but up $234 million or 7% year-over-year. Approximately 84% of the year-over-year increase was a result of higher average fuel prices during the quarter, and the remaining was the result of increased volume.

Our aviation segment generated revenues of $3.5 billion, up $136 million or 4% sequentially, and up $183 million or 5% year over year. The entire year over year increase was a result of increased volume, which was partially offset by lower average fuel prices. Finally, the land segment generated revenues of $2.3 billion, that's up $140 million or 7% sequentially and up $493 million or 27% year over year. The entire year over year increase was due to the increase in volume, which was also partially offset by lower average fuel prices. Volume in our Marine segment for the second quarter was 6.4 million metric tons. That is flat compared to last quarter, but up 1% compared to the second quarter of last year. Fuel reselling activities constituted approximately 89% of total Marine business activity in the quarter, in line with last quarter.

Our aviation segment sold just over 1.06 billion gallons of fuel during the second quarter, that's up 69 million gallons or 7% sequentially, and up 104 million gallons or 11% year-over-year. Finally, our land segment sold 758 million gallons during the second quarter, up 54 million gallons or 8% sequentially and up 189 million gallons or 33% from last year's second quarter. Our land segment has now reached an annual run rate of more than 3 billion gallons for the first time.

Consolidated gross profit for the second quarter was $172 million, which represents an increase of $15 million or 10% sequentially and an increase of $7 million or 4% compared to the second quarter of last year. Our Marine segment continues to deliver good results despite continued difficult market conditions with gross profit of $52 million in the second quarter. This represents a decrease of $3 million or 6% sequentially, but an increase of $1 million or 2% year over year. We again remain selectively cautious in the Marine marketplace this quarter, utilizing our strong risk management discipline as we have in the past.

Our aviation segment contributed $69 million of gross profit in the second quarter. That's an increase of $4 million or 7% sequentially, but a decrease of $13 million or 16% year over year As mentioned on last quarter's call, by securing alternative northern routes into Afghanistan, we were able to resume fuel reselling activities in this region during the quarter. While Pakistan's recent agreement to reopen the borders to Afghanistan is positive news, it will not necessarily result in an increase in the fuel reselling activity in Afghanistan, but rather it will provide us with more options for sourcing fuel. Therefore at this time, we expect fuel reselling activities in Afghanistan to be flat or even slightly down in the third quarter as compared to the second quarter.

Our US self supply model jet fuel inventory position was approximately 87 million gallons or $267 million at the end of the second quarter. That's up from 67 million gallons and $219 million at the end of the first quarter. While jet fuel prices increased significantly on the final day of the quarter, prices were down as much as 20% during the quarter, which resulted in a negative inventory impact of several million dollars.

Our land segment delivered gross profit of $51 million in the second quarter, an increase of $14 million or 38% sequentially and an increase of $19 million or 58% year over year. The gross profit increase was driven by organic growth in our core branded and unbranded distribution business, as well as significant growth in our crude oil marketing joint venture in North Dakota. Please note that our crude oil business began experiencing greater competitive pressures in the latter part of the second quarter, which have continued into the third quarter, Therefore, our crude oil marketing activities contribution to gross profit is currently expected to decline in the third quarter.

Operating expenses in the second quarter, excluding our provision for bad debt, were $99.1 million, which is down $1.3 million sequentially and down $3.7 million compared to the second quarter of 2011. Operating expenses excluding bad debt and intangible amortization as a percentage of gross profit or net revenue was 55.4% this quarter, down from 59.2% last quarter. For modeling purposes, I would assume overall operating expenses, excluding bad debt expense, to be approximately $98 million to $102 million in the third quarter.

Our total accounts receivable balance was $2.1 billion at the end of the second quarter, that's down approximately $165 million compared to the first quarter, primarily due to the decrease in average fuel prices across all three of our business segments. Our bad debt expense in the second quarter was approximately $600,000, that's up $500,000 sequentially, but down $2.9 million compared to the second quarter of 2011. Bad debt expense recorded in the second quarter of 2011 was impacted in part by a 43% increase in accounts receivable in the first half of last year, while accounts receivable were actually down 7% this quarter and 2% year to date. The quality of our receivables portfolio remains strong, and we believe that we remain adequately reserved.

Consolidated income from operations for the second quarter was $72 million, an increase of $13 million or 22% sequentially, and an increase of $6 million or 10% year-over-year. Our Marine segment's income from operations was $28 million for the second quarter, that's up $500,000 or 2% sequentially, and it's an increase of $2 million or 8% compared to last year's second quarter. For the quarter, income from operations in our aviation segment was $26 million, that's down just under $1 million or 3% sequentially and down $12 million or 31% compared to the second quarter of last year.

Finally, our land segment had income from operations of $28 million, that's an increase of $12 million or 75% sequentially, and it's up $14 million or 102% year over year. Once again, second-quarter results were positively impacted by the exceptional results in our crude oil marketing and logistics joint ventures. Therefore, approximately $6 million of land's reported operating income is recorded as minority interest expense on our income statement. Consolidated EBITDA for the second quarter was $74 million, which represents an increase of $7 million or 10% sequentially, but a decrease of $2 million or 3% year over year. The Company had nonoperating expenses primarily consisting of interest expense of $5.5 million in the second quarter, that's up $1.4 million compared to the first quarter, and up $1.1 million compared to the second quarter of last year. Excluding any foreign exchange impact, I would assume nonoperating expenses to be between $5 million and $6 million in the third quarter of 2012, generally consistent with the second quarter.

The Company's effective tax rate for the second quarter was 17.9%, which is flat year over year, but up from12% in the first quarter of this year. Remember, the 12% tax rate in the first quarter of this year was impacted by a discrete item which did not repeat this quarter, resulting in the second quarter tax rate that is more in line with our historical rate. For modeling purposes, our average tax rate over the remainder of the year should be somewhere between 18% and 21%. Our net income for the second quarter was $48.6 million, an increase of $2.2 million or 5% from the first quarter, but a decrease of $1.6 million or 3% year over year. Non-GAAP net income, which excludes amortization of acquisition related, identified intangible assets and stock based compensation, was $52.8 million in the second quarter, flat sequentially, but a decrease of $4.08 million or 8% year over year. Diluted earnings per share in the second quarter was $0.68, that's an increase of 5% sequentially but a decrease of 3% year over year, and non-GAAP diluted earnings per share was $0.74 in the second quarter, which is flat sequentially but down 9% year over year.

In terms of our balance sheet, our trade cycle decreased sequentially to 8.1 days, and our return on working capital increased to 33% this quarter. Cash flow from operations during the quarter was negative $106 million, compared to positive operating cash flow of $49 million last quarter and $7 million in the second quarter of last year. While the decline in oil prices generally produces positive operating cash flow, there are two specific items which resulted in uses of cash this quarter, which led to the negative cash flow result.

First, we increased inventories by $107 million this quarter, part of which related to inventory investments related to rebuilding our government business in Afghanistan, and operating cash flow was also impacted by an increase in cash collateral deposits with financial counter parties related to derivative activities. The sharp drop in fuel prices during the quarter resulted in nearly $140 million increase in such deposits sequentially. Excluding these deposits, our operating cash flow would be approximately $34 million positive. Please note that with prices up so far this quarter, such deposits have already declined significantly, increasing our cash balance from where it was at the end of the second quarter.

In closing, we continue to execute on our long-term growth strategy by capitalizing on our diversified business model. We are pleased with how our segments are performing and continue to identify areas for improvement and future growth. We maintain and continue to maintain a healthy liquidity profile, which allows us to fund our growth initiatives in this volatile pricing environment. Finally, we remain the counter-party of choice for our customers and suppliers, while maintaining our very important core risk management disciplines.

I would now like to turn the call back over to Jameson to open up the Q&A session.

(Operator Instructions)

We will pause for just a moment to compile the Q&A roster. Jon Chappell.

Just to start off with a numbers question for Ira, I didn't think I caught it, but did you mention the impact of the self supply business in the second quarter? I know it's been all over the map the last few quarters and I want to see if it was positive or negative impact on 2Q?

Good question, Jonathan. I hope all is well. I did mention there was a negative impact, and it was actually, remember there was a 20% drop in jet fuel prices from peak to trough during the quarter, which is pretty significant. Overall, we recognize the negative impact of somewhere between $6 million and $7 million in the quarter.

That's good to know. Ira, also, this either for you or for Mike. You said in your closing comments about the counter-party of choice. When I was reading your commentary in the press release about your balance sheet, it got me thinking back to late 2008 when the credit environment tightened up. I know we are nowhere close to the credit environment of late 2008, however, I know the banks are also being far more strict with their lending right now. How has the competitive landscape of your business changed in the last 6 -12 months as far as credit is concerned, as far as World Fuel's competitive advantage with your balance sheet and the fact that you have transparent financials?

Jonathan, that is a great question. We are definitely noticing a bit of that. I think the number of lenders has definitely decreased in the marketplace. We are seeing that we are getting approached more regularly by a number of different participants in the marketplace for our financial capabilities. It is certainly something that differentiates us from the competition, so it's continuing the strong part of our value proposition in the marketplace.

Whether it is for our shipowner clients or our supplier clients who may need some financing, they will look to us for flexible payment terms, whether it's paying early or whether it's extending terms, so we've got the ability to do that and work with them from a merchant banking perspective. We have been doing that for a long time and we're certainly doing a bit more of it these days. We understand who the strong players are in the marketplace, what their business models are like. Some of them have difficulty getting a community bank or local bank to understand their business models. We've got the ability to construct different ways to protect ourselves through a variety of different means, so it's certainly a bigger part of what we do on an everyday basis and we've got the teams of individuals who know how to construct those types of transactions.

For my one follow-up then to just follow up on that point, I have seen that you have been using some of your variety of ways to chase some counter parties as we have spoken about in the past, the shipping business is incredibly difficult right now. When you think about your risk that you are willing to lay out in that business, and then you layer that on top of some kind of shifts going on in the logistics business, especially with the new fuel restrictions, are you scaling back at all to be more conservative with your risk management policies, or do you view this as an opportunity where you do have the financial wherewithal to take on a little bit more risk and it's an opportunity for you to garner more business in a cyclical industry that is down right now, but, hopefully, at some point will come back.

It is really picking your places. We will walk away from a lot of business. Some of our business and some of our counter parties and some of our shipowners, we understand their business models, we may go a little deeper than some other folks, so it really just depends on the location, the jurisdiction, who the customer is, what dollar amount we're talking about, and possibly what the returns are, the risk adjusted returns, but we are pretty engaged in the marketplace. I can't say that what we do is in any different than what we have always done.

We are certainly spending a lot more time physically in our clients' offices in those markets, our folks are traveling around a heck of a lot more, so it's certainly a point of differentiation, it's certainly a point of business development, not only on our shipowner clients but on our suppliers and also within the aviation side on our distributors, and land and aviation within general aviation and commercial aviation. You can call it almost a line of business and an area of expertise that we have with our financial and credit and risk teams. It is certainly something we utilize regularly, and it has become a normal course of business for us.

Thanks Mike. Thanks, Ira.

Jack Atkins.

Good afternoon, thanks for taking my questions. If we could just go back to the self supply business for a moment, could you maybe talk about -- has the negative impact corrected itself so far in the third quarter or (inaudible) appear to be a drag this quarter as well?

Jack, we're hearing some background noise.

On the self supply side to go back to that for a minute, could we talk about the impact that is having on the third quarter? Have you seen the negative issues correct themselves so far through July and into early August?

It is tough to say. There certainly hasn't been additional negative impact, there hasn't been much of a move in either direction in that regard, I would say, for the month of July. Slightly positive.

Okay, but still sort of negative on the year over year basis it sounds like, Ira?

Effectively, yes, because one month is not going to change that year over year analysis if that is what you're getting at.

When we think about the aviation business overall, I know that the southern route, as you mentioned, has been reopened on that Afghan Pakistan border, and that is going to help with your sourcing. Should that help improve the spread there in the aviation business going forward now, or should we expect the level we have seen the last couple of quarters to be the run rate going forward?

As I alluded to on the call, certainly the flexibility gives us some opportunities probably more on the balance sheet side than on the P&L side in terms of managing the relationships as effectively as we can in that region, but there's a lot of uncertainty that still remains over there. Mike may want to elaborate on that. As I mentioned earlier, our expectation, at least in the near term, based on what we know today, is for that performance to be similar to slightly down in the third quarter as compared to the second quarter.

I think the only thing that I will add is it does give us flexibility as I said previously. We did open up those northern routes and those relationships. It used to be that we leveraged our commercial supply into our military, and now we are leveraging our military activity into our commercial, so we would certainly make use of that new supply capability on the northern distribution network, but the results I think are as Ira indicated.

Great and then last thing from me. If you could just touch on the M&A environment for a moment, it's been a little over a year since your last meaningful transaction, so I'm curious what you're seeing on the M&A front? Is it a function of you're not seeing a lot of deals out in the pipeline or is it a matter of the price isn't agreeable to you guys, I'm just kind of curious on your thoughts on that subject.

I'm sure you will observe that we have been active with a lot of smaller strategic activity in the quarter. All of that was in the aviation side. Those were good pickups and non material, so we didn't really announce those. I think that the market profile is definitely appealing to us in our various businesses, so I think you will be hearing something from us in a relatively short period of time.

Okay, great. Thank you, guys.

Ken Hoexter.

Good afternoon. Ira, it sounded like you mentioned during your run through a couple of things are going down or we should expect to maybe see down in the third quarter, I think you mentioned through Marine aviation Atlanta, I think each of the three segments, is that economic you are looking at it coming in? Is it losing market share to others? I saw that Pilot is buying a fuel supplier, Maxim, were they a competitor of yours, or are companies like that taking share? Maybe if you could run through a little bit there.

I will repeat what I said, and Mike can elaborate more broadly. I don't think I said anything about Marine. My comment is related to both aviation and land. In aviation's case, it was the government piece I said we expected to be flat to slightly down as we just repeated in the last question. Aside from that, there were no quote-unquote negative comments on the aviation side.

On the land side, in terms of crude, we had exceptional performance in the second quarter, which changed a bit as we got into the last month of the quarter, and the first month of this quarter is more similar to June than it was in April and May. Based on what we know today, the expectations are that it would be very difficult to repeat that crude joint venture performance in land. Aside from that, there are a lot of opportunities for land, and the core land business did perform quite well in the second quarter, and those teams are continuing to focus on strategic opportunities to grow that business. So those really were the two relevant comments I made during my opening remarks.

Ken, just to add to that, as you all know and we have mentioned numerous times, the size of that land market is significant, and there are a number of different spaces. We have a sizable position in the branded and unbranded dealer distribution business, distributing gasoline and diesel to gas stations primarily in the Midwest. We like that business, it is stable, it throws off a nice return, and then we complement that with a wholesale business, a rail business or crude business supplying to end-users, lubricants, a variety of different activities. So it's a mix. We like having the mix. We like having a multifaceted approach. We think that is supportive of the good offering in the marketplace and in terms of giving predictable results. It is the space we feel good about. We had some good organic growth, and we'll continue to invest in that space.

Just to understand that, if the land I guess gets thrown off by the variability of this joint venture, would you want to just break out the joint venture, or do you have to consolidate it into land, I'm thinking of just why not put the sum in that non controlling interest? Or just your income?

GAAP doesn't necessarily allow you to do it that way in terms of putting it into non controlling interest, but because of the fact that the minority interest is reflected on a separate line, and I would say 98% of that line relates to the two domestic land joint ventures, it makes it pretty easy to sort out on the P&L as presented today.

Okay. Can you dig into the $29 million of acquisition, you mentioned three in aviation, were they at the end of the quarter or early in the quarter or domestic or international, can you give us insight on what you have been acquiring into?

They were spread throughout the quarter. They weren't necessarily --

These are relatively small local distribution businesses. One was in the Caribbean, the other was in Africa and a third one was a software business. They were all within our space, all within our core area, very competent individuals that fill spots in strategic areas so these were great pickups. We are looking to create a good amount of efficiency in terms of bringing those companies quickly into the fold. I think one of the things is we are building more of a broad-based deal mentality in our organization, so we feel good about that. These are transactions that are being handled on a regional basis. It is still a pretty fragmented market. While they're not necessarily going to move the needle, we think that it makes sense to continue to go down that road while we look at bringing on more substantial sized businesses into the fold.

I appreciate the time.

Kevin Sterling.

Good evening Mike and Ira. Let me start with the big picture question. You alluded to the fact we saw oil prices move, at least in jet fuel, from peak to trough about 20%, and we saw a big decline in the quarter. As oil prices fell through the quarter, did you see your customers' behavior change in any of your verticals? For instance, maybe on the Marine side, as bunker fuel prices fell later in the quarter, did you see customers buying larger stems or did you see any customer behavior changes throughout the quarter?

As the market started to drop off, we have got a level of sophistication on the derivative side in terms of risk management, and as the backwardation falls off, our activity in terms of selling those contracts tails off as well. That certainly had an impact within the quarter, our ability to sell those contracts and bring that volume into the quarter was definitely compromised, that's the way it goes, and I think the nature and the position of owners now, and operators, is a little bit of a wait and see, a little bit tentative, and that is certainly impacted the results in the quarter. What goes down comes up and vice versa, none of this stays the same for very long, and as that comes back, we will pick up that activity so that definitely had an impact and that was part of the mix within the quarter.

Thank you, Mike. Ira, you briefly mentioned I think the spike in jet fuel on the last day of June and that negatively impacted your gross profit, can you help me understand how that -- was there a mark-to-market aspect of it, and why that negatively impacted your aviation gross profit?

That was certainly part of it, on the last day of June, there was a significant spike, I think crude went up $6 or $7 in that day alone, and jet fuel prices went up somewhat consistently, so there is a mark-to-market on our hedges, and we wouldn't see the physical benefit of that until July. A good part of that will likely come back in the beginning of the third quarter or -- that's passed already, like we came back in July.

Okay. My last question, it sounds like as we think of the land business going forward and the next quarter, do you think we will see a little bit of margin compression, is that how we should think of it from a modeling perspective?

Margin compression in what period?

In the next quarter and in your land segment?

I think it's fair to assume that margins would be a bit more normalized because of the comment they made about crude, so that is a fair comment.

Thank you for your time this evening. I really appreciate it.

Ken Hoexter.

I was going to ask about the gross profit for aviation gallon being down 24%, but it I think you hit it with the crude jumping up on the mark-to-market right, Ira?

On the land side, that's right. The crude is on the land side, are you talking about the crude?

My question is it looked like the aviation gross profit per gallon was down 24% year-over-year.

That was driven by the combination of the inventory impact that I described, which flows through gross margin, and the year-over-year decline in government related activity, which obviously carries a higher margin than our average.

That was my quick follow-up, I appreciate that.

Jack Atkins.

One quick follow up. I was wondering if you could touch on the progress you are making with your government related business to maybe think forward a year or two and the wind down in Afghanistan from NATO and the US Forces that are going to take place. Maybe you could fill us in on the progress you are making expanding your NATO business outside of the Middle East.

Sure. We never really look to acquire a company as an end to the story, but really a means to drive the strategy. We have been in the military activity since the late 80s. Our NCS acquisition was another step in advanced logistics. The minute we made the decision to acquire that company, we also made the decision to set up shop in other locations, whether it was for humanitarian aid, natural disasters, military activities, maneuvers or what have you, there was quite a bit of that activity with various militaries and NGOs and, while we don't have anything to report now, I'm confident that our ability to establish post in various different locations is something that we will be successful at.

There's a good amount of this activity, we've got a level of expertise, we've got a good cadre of partners to make these operations and initiatives successful and these campaigns successful. The beauty of this is that it's like car racing for automobile manufacturers. As we understand how to be successful in these locations, we take some of that technology, whether it is tendering or partnering with other folks or understanding complicated logistics, and we apply it to our commercial activities. We like the activity, we have got a lot of talent within the Company. NCS brought us a lot of contacts, and we have been recruiting folks. While we don't have anything specific to report on, I am confident that we will be successful at growing that business beyond Afghanistan.

Thank you guys, I appreciate it.

At this time, we have no other questions in the queue.

Thank you very much. We appreciate the support and we look forward to speaking to you next quarter.

Ladies and gentlemen, this does conclude today's conference call. We thank you for your participation. You may now disconnect.