World Kinect Corp (WKC) 2013 Q1 法說會逐字稿

At this time, I would like to welcome everyone to the World Fuel Services 2013 first-quarter earnings call. My name is Dave, 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 that time the beginning of the Q&A session.

It is now my pleasure to turn the Webcast over to Mr. Jason Bewley, Vice President of Corporate Finance. Mr. Bewley, you may begin your conference.

Good evening, everyone.

Welcome to the World Fuel Services 2013 first-quarter conference call. My name is Jason Bewley, Vice President of Corporate Finance, and I'll be doing the introductions of this evening's call, alongside our live slide presentation. This call is also available via Webcast. To access this Webcast or future ones, please visit our website, WFScorp.com and click on the Webcast icon. With us 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 our non-historical facts, particularly comments regarding World Fuel's plans and expected performance are forward-looking statements that are based on assumptions that management believes are reasonable. They are subject to a range of uncertainties and risks that could cause actual results to differ materially from the forward-looking information.

A summary of the Risk Factors that could cause results to materially differ from our projections can be found in our Form 10-K for the year ended December 31, 2012 and other reports filed with the Securities and Exchange Commission. Our comments will include non-GAAP financial measures, as defined in Regulation G. The reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures and other information required by Regulation G has been posted on our website. We will begin with several minutes of prepared remarks, which will then be followed by a question-and-answer period.

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

Thank you, Jason, and good afternoon everyone.

Today, we announced earnings of $48.7 million, or $0.68 per diluted share for the first quarter of fiscal 2013. Overall, we are pleased with our results, and we ended the quarter once again with a very healthy level of cash and liquidity. In an operating environment that has seen little improvement to start the year, our Company delivered a solid performance overall, and continued to place an emphasis on our strategic initiatives.

We made a significant acquisition in Multi Service at the end of 2012. Multi Service is an exciting extension of our solutions-based offerings in transportation, logistics, energy and payment processing. We are very excited about the opportunities this acquisition will create over time.

Within Aviation, our team delivered a good start to the year, experiencing success in both commercial and business Aviation, and we are optimistic in our prospects for the remainder of the year across our Aviation platform. Our strong position in the market continues to add value to the multitude of customers and suppliers we serve throughout the world. With oil prices generally stable, our commercial and business customers are poised to continue to perform well financially. As a partner to both commercial and business customers, a healthy airline industry is a positive for our Company.

The market in Marine continues to present a formidable challenge, as our first-quarter results show. While volume was up both sequentially and year-over-year, gross profit declined, as our business mix shifted further towards blue chip customers in major ports, and there was also limited price volatility during the quarter. Our team remains disciplined in its approach to risk and credit, and we continue to actively compete in all areas of the Marine business. Though we don't anticipate a fundamental shift in industry dynamics in the near term, early results to date indicate an improved outcome in Marine in the second quarter.

The Land team continued its execution of our multifaceted strategy in the first quarter. Land's results, which include the majority of Multi Service's operations, rebounded from the fourth quarter, and generally performed well as we continue to grow this important segment of our evolving business. The Land segment is a combination of many diverse business lines across regions of the United States, the United Kingdom and Brazil.

From crude oil trading to Rail logistics, to our Dealer business and now including technology, Land continues to represent a solid growth opportunity for World Fuel, and the first quarter's results are an example of that. For the first time, Land's gross profit surpassed Marine's in a quarter, and this demonstrates the growing diversity of our business model, with three independent segments and many distinct lines of business coming together to provide balanced growth and solid performance for our shareholders.

Time and again, our business model has proven itself resilient, despite the volatile markets in which we operate. Our customers and suppliers appreciate the strength of our balance sheet, and the convenience and professionalism that comes with doing business with us. Our value comes from the breadth and quality of our products and services, and most importantly our people. We are a global, hyper market of energy, logistics, risk management and technology, helping to bring clarity and simplicity to a complex and essential component of the supply chain. As our team of 2,500 strong around the world seeks to drive organic growth and pursue other opportunities, we will remain disciplined and strategic in our investment criteria.

With that, I'll now turn the call over to Ira Birns for a financial review of the results.

Thank you, Mike, and good evening everybody.

Consolidated revenue for the first quarter was $10.2 billion, up 3% sequentially, and up 7% compared to the first quarter of last year. The year-over-year change in revenue was entirely attributable to the increase in overall volume across all three of our business segments, offset by lower average fuel prices.

Our Aviation segment generated revenues of $3.9 billion, up $21 million, essentially flat compared to the fourth quarter, but up $519 million, or 15% year-over-year. Approximately 79% of the year-over-year increase was a result of increased volume, and the remainder was a result of higher average jet fuel prices.

Our Marine segment revenues were $3.7 billion, up $268 million or 8% sequentially, but down $187 million or 5% year-over-year. The entire year-over-year decrease was a result of lower average bunker fuel prices, offset by increased volume. Finally, the Land segment generated revenues of $2.5 billion, down $41 million or 2% sequentially, but up $373 million or 17% year-over-year. The year-over-year increase was entirely due to the increase in volume, offset slightly by lower average fuel prices.

Our Aviation segment sold 1.1 billion gallons of fuel during the first quarter, down 23 million gallons of 2% sequentially, but up 127 million gallons, or 13%, year-over-year. The sequential decline in volume was principally related to the fact that the first quarter had two less days than the fourth quarter.

Volume in our Marine segment for the first quarter was 6.8 million metric tons, up 200,000 metric tons or 3% compared to last quarter, and up 400,000 metric tons or 6% year-over-year. Fuel reselling activities constituted approximately 92% of total Marine business activity in the quarter, which is up 5% compared to last quarter.

Our Land segment sold 840 million gallons during the first quarter, down 34 million gallons or 4% sequentially, but up 136 million gallons, or 19% from last year's first quarter. Similar to Aviation, the sequential volume decline was also impacted by two less days in the quarter, as well as difficult weather conditions in the Midwest, which impacted demand during the quarter.

Gross profit for the first quarter on a consolidated basis was $182 million, which represents an increase of $19 million or 12% sequentially, and $25 million or 16% compared to the first quarter of last year. Our Aviation segment contributed $77 million of gross profit in the first quarter, an increase of $1 million or 1% sequentially, and $12 million, or 19% year-over-year. Our self-supply model jet fuel inventory position was approximately 104 million gallons, or $322 million at the end of the first quarter, up from 90 million gallons or $284 million at the end of the fourth quarter.

The movement of jet fuel prices and the relationship between jet fuel and heating oil prices during the quarter only had a slightly positive impact on first-quarter results. The first quarter benefited from solid results in our business Aviation segment, aided in part by strong seasonal de-icing fluid sales, as well as a full quarter of Multi Service Aviation-related revenue, offset in part by a decrease in government-related activity.

Our Marine segment generated $42 million in gross profit, down $6 million or 12% sequentially, and $13 million or 24% year-over-year. Clearly, the Marine market remains weak, and the weakness we experienced in the first quarter was greater than expected. As we continue to diligently navigate through a challenging global Marine marketplace, we experienced a further shift in business mix to lower-margin, lower-risk business. Limited volatility throughout the quarter also contributed to the weakness experienced in the first quarter. As we look forward, early second-quarter results reflect signs of improvement, driven principally by heightened volatility levels, resulting in expectations of a better outcome, as compared to the first quarter's results.

Our Land segment delivered a very strong quarter, with gross profit of $64 million, up $24 million or 60% sequentially, and $26 million, or 71% year-over-year, inclusive of our recent Multi Service acquisition. Our fuel-related Land business delivered gross profit of $53 million, up $13 million or 33% sequentially, and $15 million, or 42% year-over-year.

With Hurricane Sandy well behind us, our Western petroleum business rebounded nicely in the first quarter. Our domestic crude business, which once again is operated through our joint venture, and our Canadian crude business, which operates through our Western group, were generally stable in the first quarter. However, spot activity in our Canadian crude business will likely decline in the second quarter, driven by current pricing dynamics in this particular market. Multi Service performed to our expectations in the first quarter, and we remain excited about the myriad of opportunities on which Multi Service remains actively focused.

Operating expenses in the first quarter, excluding our provision for bad debt, were $114 million. Excluding Multi Service, our operating expenses were down $5 million sequentially, and excluding Multi Service and Carter Energy, expenses were effectively flat compared to the first quarter of 2012. Overall, operating expenses as a percentage of gross profit declined sequentially, and we remain highly focused on driving further operating efficiencies across our Business going forward. For modeling purposes, I would assume overall operating expenses excluding bad debt expense of approximately $115 million to $120 million in the second quarter.

Turning to the balance sheet. Principally driven by price increases, our total accounts receivable balance grew to $2.5 billion at the end of the first quarter, up approximately $300 million, compared to the fourth quarter. Our bad debt expense in the first quarter was approximately $1 million, up $700,000 sequentially, and approximately $1 million compared to the first quarter of 2012. The sequential increase in bad debt expense is principally related to the increase in accounts receivable during the quarter, as well as the establishment of a bad debt reserve for Multi Service. Consolidated income from operations for the first quarter was $67 million, an increase of $13 million, or 23% sequentially, and an increase of $8 million or 13% year-over-year.

For the quarter, income from operations in our Aviation segment was $35 million, down less than $1 million, or 2% sequentially, but up $8 million or 30% compared to the first quarter of 2012. Our Marine segment's income from operations was $15 million for the first quarter, a decrease of $5 million, or 26% sequentially and $12 million, or 44% compared to last year's first quarter.

Finally, our Land segment had income from operations of $27 million, which is up $15 million sequentially, or 118%, and $11 million, or 69% year-over-year. Excluding Multi Service, income from operations was $25 million, still up $13 million sequentially or 101%, and $9 million or 56% year-over-year.

Consolidated EBITDA for the first quarter was $76 million, an increase of $13 million or 21% sequentially and $9 million or 13% year-over-year. Our non-operating expenses, primarily consisting of interest expense was $3.5 million for the first quarter, down $800,000 compared to the fourth quarter, and down $600,000 from the first quarter of last year. The sequential decline is principally driven by lower average borrowings during the first quarter, and the year-over-year decline is principally driven by lower average borrowing rates. Excluding any foreign exchange impact, I would anticipate nonoperating expenses to be approximately $4.5 million to $5.5 million in the second quarter.

Our effective tax rate for the first quarter was 19.4%, compared to 10% last quarter, and 12% in the first quarter last year. The tax rate this quarter is in line with our full year guidance, which we provided during last quarter's call, and that was 18% to 21%. We continue to expect our 2013 full-year rate to fall in the same 18% to 21% range.

Our net income for the first quarter was $48.7 million, an increase of $6 million or 14% from the fourth quarter, and $2 million or 5% year-over-year. Non-GAAP net income, which excludes amortization of acquisition-related identified intangible assets and stock-based compensation was $55 million in the first quarter, an increase of $3 million or 5% sequentially, and $2 million or 4% year-over-year.

Diluted earnings per share for the first quarter was $0.68. It's an increase of $0.08 or 13% sequentially, and $0.03 or 5% year over year-over-year. Non-GAAP diluted earnings per share was $0.77 in the first quarter, an increase of 5% sequentially and 4% year-over-year. Our overall net trade cycle remained effectively flat at 8.4 days in the first quarter, when compared to the fourth quarter, and 8.2 days in the first quarter of last year.

Our cash position was $160 million at the end of the first quarter, compared to $173 million at the end of the year, and $243 million in the first quarter of 2012. We generated $110 million of cash flow from operations during the first quarter. Exceeding the $98 million we generated if the fourth quarter, and $49 million which we generated in the first quarter of last year. While we've invested nearly $220 million on strategic acquisitions during 2012, our operating cash flow over the past five quarters has aggregated to $255 million, resulting in a net improvement to our balance sheet with debt to EBITDA down to 0.9 times in the first quarter, our lowest leverage level since the second quarter of 2011.

So in closing, our first quarter again demonstrates the diversity of our business model. While Marine struggled with difficult market conditions, Aviation was stable, and Land outperformed expectations, resulting in strong overall results. We remain focused on maintaining a strong liquid balance sheet, and are keenly focused on driving improved operating efficiencies, which should enhance profitability and continue to provide strong support for organic and strategic investment opportunities in 2013 and beyond.

I would now like to turn the call back over to our operator to begin the Q&A session.

(Operator Instructions)

We'll take our first question from Jon Chappell with Evercore Partners. Your line is live.

Mike, I wanted to ask you a question about the Marine business, maybe a little bit differently than the way I've asked it in the past. Clearly ships are still moving, bunkers are still being sold. You've obviously scaled back your risk and gone to a lower-risk, lower-margin type business, but I would assume that in the industry today there's probably more higher risk business given the balance sheets of a lot of the shipping companies. So my question is who is taking that business on? What does the competitive landscape look like today? And then what's your comfort with your ability to come back once the Marine business starts to get its feet under it, and regain some of that other business that you may have sacrificed right now, given the counter-party concerns.

Good question. I think a big part of success in the Marine business is patience. You certainly know from your years in this space that you get a lot of people doing a lot of interesting things. Sometimes, it seems like science fiction, with the number of folks that jump back into the market. So it's a spot market. Things always change. As it relates to who's taking that risk, it's still fragmented. You have a lot of small players that maybe place some bets. There's some amount of prepay there that's going on. We don't necessarily participate in some of that, even though it's very tempting. There are some folks that take a little different risk profile, and are willing to perhaps lose a little bit of money, and they'll work the numbers that way. We're not necessarily participating in that particular space, whether that's right or wrong, that's our disposition at the moment.

I think we've got an excellent franchise. We continue to innovate and build our network, and you certainly have an appreciation for the state of the industry. We're taking our focus not so much -- obviously, we're engaged and understanding that risk. But we like some other parts of the supply chain, and we're really focusing our time and effort on some other opportunities that may be long-term oriented. You always have that business that you can pick up, but I don't know, maybe we're getting a little bit older, a little bit more conservative where we really don't want to take so much of that credit risk. But certainly, if you look at the tanker side, the crude tanker side, you -- of course you know what the profile on that looks like, and the dry bulk, the container side I think is looking a little bit better. I think that, combined with the lack of volatility in the marketplace, we do well when there's good amount of movement in terms of creating value for some of those mainstream customers. We haven't had a lot of that. That definitely takes some wind out of the sails. But we are more developing the business in a number of different areas.

The market's going to come back. We're re-evaluating our profile on risk in some of these areas, but demand is not robust. You've got consumption that is off and you've got a reasonable amount of supply, it's a little bit sloppy out there, but it will change. We know that. I don't know if that gives you your answer, or if you've got a follow-on to this initial question.

No, no, very helpful. Very thorough. I appreciate that. A little different than how you've addressed it in the past, so very helpful. My follow-up question is regards to uses of cash. You paid down almost $100 million of debt in the first quarter. Obviously, debt's still relatively cheap, so can we read that into thinking that it's a commentary about the acquisition environment, maybe not as robust as it may have been in the past, or was this just strictly the working capital ebbs and flows over quarters, you had two great quarters of accounts payable working to your favor, relative to receivables, and the near term use of that was just to pay down some of the leverage?

I think it's principally -- good question, Jon, principally the latter. At the end of the day while we had a $300 million increase in accounts receivable, driven heavily by price in the marketplace, our accounts payable were up even more than that. So we managed that AR versus AP equation very well in the quarter. It contributed to a solid result. It had nothing to do with the M&A environment. We're always looking at opportunities there and which quarter they land in is really more determined by when we're ready to get a deal done. The first quarter was just an example -- it wasn't necessarily a high growth quarter, which involved significant increases in net working capital, inventory was up a little bit, but we more than made up for that with the payable increase over the receivable increase.

Okay. Understood. Thanks, Ira. Thanks, Mike.

We'll take our next question from Greg Lewis with Credit Suisse. Your line is live.

Mike, I guess my first question is related to the impact that we've seen in Aviation over the last couple weeks, given the shutdown of American about a week ago, and then the whole sequester, where there's clearly been a lot of flights cancelled, a lot of delays. In thinking about all the headaches that were experienced over the last week, was that able to provide you guys any opportunity to make additional money or is it more just, hey, there were less flights so there's less volume and it's just going to be a little bit softer in the second quarter?

I know, as a passenger, there was an impact. I want to be careful how I answer the question, because some signs of these impacts were a little bit delayed. I certainly, to the best of my knowledge at this stage, I haven't seen any impact. But you never can tell when you have ripple effects. At this stage, I don't think that's something that we're seeing.

And then as we turn it over to the Land business, as we think about Multi Service and its impact in the first quarter, when we think about leveraging Multi Service and Land, do you think we're in -- is there a lot more upside for leveraging Multi Service into Land, or we've taken advantage of it, and it's going to be a nice run rate going forward?

This is something that I think is going to have a significant impact on the Company over the long term. I think as I mentioned last quarter, Multi Service is a free-standing, successful business, and has been for many years. Certainly they've operated that as a closely held private Company, and now as part of our group, we're certainly giving them greater capability to spread their wings. They provide solutions using technology and it's a great parallel and companion business to the solutions that we've provided in the physical world. So we're actively looking at growing that business. We certainly like the international aspect of it. There's certainly the capability of bundling their offerings. We feel good about that, and it's still in the early stages of that, but we'll look to grow that business organically, combining it with all of the services and the products and introduction to the clients and the suppliers that we have, as well as bolting on and combining other acquisitions in the same space.

And then when we think about Multi Service going forward on the international basis, is it going to be similar to what we are seeing in North America, where it's primarily Land, or is there maybe an outsized Aviation opportunity for Multi Service internationally?

The Land space is certainly the bigger one. It's the more obvious one, so I'd say that that's more probable. But when you start to get into the wonderful world of technology, and solutions, using technology, it's a pretty broad space. So that's the exciting aspect of it. But certainly, Land is the most likely area that we'd see expansion in.

Okay. Thank you for the time.

We'll take our next question from Jack Atkins with Stephens. Your line is live.

Hey, guys, this is actually Connor Hustavo on for Jack today. First question from me is, can you help us understand what's driving the strategic decision internally to cull the lower credit quality Marine business? And what do you think you need to see in the market to take a step back out on the risk curve there?

Well, I think that is something that is a combination of things. I think we called out not only that dimension, but also the fact that there is slack demand, and you do have a lack of volatility, which is significant. I make no bones about it, and we've said this for quite some time, a big chunk of our value-add is being able to provide values through our risk management function, in terms of managing the forward curve, backward dated markets, volatile markets is where we do get to add a little bit more value. The lack of volatility definitely has an impact on our margins. So it's not only that dimension, and demand is soft and competition hasn't gone away. We, I think, are conservative. We prefer to earn our keep through providing value and innovation and services and outsourcing to our large clientele. You see, our volume has moved up. It's had some of an impact. That revenue management equation certainly is an important dimension to it. The shipping industry is not in a great place. I think that we'll probably be in this mode for a little while, but as the economy starts to recover -- certainly China demand is off, Europe is still weak. But as you start to see different sectors come through, I think you'll start to see our results improve.

Okay. Great. That's helpful. And then for my second question, curious if you all could talk about how a narrowing spread between Brent and WTI affects profitability in your North American crude operation?

Sure. If you look at -- if you look at the refineries on the East Coast, a lot of those refineries would take West African product that was priced on Brent. Right now, you've got a lot of crude that's coming out of North Dakota, that's coming out of Canada, that's priced on WTI. So that spread makes that crude oil more competitive. Our Canadian business is a spot business, unlike our North Dakota business, which is more term-based and has unique logistic properties. Canada is a spot market, so our ability to move Canadian crude down into the US market is going to be a function of that spread, and just basic supply/demand dynamics.

Okay. Great. Thanks for the time.

We'll take our next question from Ken Hoexter with Bank of America Merrill Lynch. Your line is live.

It's actually Wilson sitting in for Ken. My first question was, looking at the cash flow statement, I noticed that the CapEx spend jumped pretty high this quarter, to nearly $13 million. Can you give us some color around where the extra capital is going and what can we expect for the rest of the year around that?

The number is definitely moved up a bit in this particular quarter. There were $2 million spent around our Falmouth facility in the UK, basic upgrades and upkeep of that facility. That will be ongoing over the balance of the year, so we'll be spending some more money there, and we spent a little bit of money in the Bakken area in terms of that project. There's some capital investments tied to that joint venture that we made and there will be a little more of that over the course of the year. So there were a couple of items in there that were one-time. There were a couple that will be there over the next couple of quarters. The balance of this year will clearly show, while not a very large number, a higher number in quarterly CapEx than we saw last year.

Can you quantify that as a percentage of revenues possibly, or even as a cash flow, or that's TBD?

I think the number you saw this quarter was probably a little higher than what the average quarter will be for the balance of the year. It may not be completely linear, but it's certainly going do be closer to the ballpark of where we were this quarter on a quarterly basis from a cash flow standpoint, than where we were, let's say, in Q4.

Got you. Just a follow-up, I guess, with the earlier question on the cash level and leverage. Where is a comfortable level that INT feels is appropriate to run the business, given your volatility outlook? Or is there a leverage level that you guys look to keep the business around absent any kind of acquisition opportunities?

Well, we very often stated the answer to the cash question. The number on our balance sheet is basically the answer. We've been trying to keep that number in the range of between $100 million and $150 million. The last couple of quarters, actually a little bit higher, because we didn't have any more short-term debt to pay off. But generally, $100 million to $150 million is a number that we're more than comfortable with, and that's where the number's been, you go back many, many quarters, you'll see that we've either been in that range or slightly above it. In terms of leverage, as I mentioned in my prepared remarks, our leverage was under one time this quarter. We don't feel a burning desire to keep it at that level, but we also aren't looking to increase that number by large multiples either. So if the right deals come along, we're very comfortable in using some more of our liquidity on our balance sheet to fund those opportunities, but we're also very focused on maintaining a strong balance sheet. So tough to state an exact number, but we're certainly more focused on remaining closer to the unleveraged side of the equation, than what some companies look like, in terms of companies with significant leverage. We're not looking to move in that direction.

Sure. If I could squeeze one last question in. If I try to do the math around the Land business, I think you called out that $2 million of the gross profit was probably attributable to the Multi acquisition. But looking at it on a sequential basis, it looked to be a pretty steep ramp-up. Were there any one-time items that are flowing through on that bend, and if so, could you give some more color around it?

I'm not sure where you got the $2 million from. In my prepared remarks I said that total gross profit was $64 million and fuel-related Land business delivered gross profit of $53 million.

Oh, okay. Got you.

That was -- the rest of that was acquisition-related and then if you look at the delta between the $53 million and last quarter, which was still pretty nice, a very large chunk of that was the rebound in the Western business that we talked about.

Thank you for the clarification.

(Operator Instructions)

And we'll take our next question from Kevin Sterling with BB&T Capital Markets. Your line is live.

Hey, it's actually William Horner on for Kevin. Going back to Marine for a second, and your improved outlook for the second quarter, obviously I know you touched on a lot tonight, Mike, but a lot of moving parts on the demand and credit side. Should we view your improved outlook as more of an improvement in seasonal volumes and flat spreads? I know you mentioned there's still some decent competitive pressures.

Yes, I think a big chunk of it is going to be related to the amount of volatility that we're going to see in the marketplace and what the forward curve is. So I think we're going to have a moderate recovery. Certainly this quarter we're not really too pleased with, so we could see some recovery off of this quarter, but it's just too soon to tell.

Okay. Thanks. And Ira, just one housekeeping. I missed in your prepared remarks on the Aviation side, what your gain on the supply side was. Could you go over that again one more time real quick?

The inventory related number that I talk about often? I said it was fairly inconsequential this quarter. It was only slightly positive.

Okay. Thanks.

I'm showing no further questions in queue.

Okay. Well, thank you for joining us. We feel good about the evolution of our global business, and look forward to discussing our results with you next quarter. Take care. Stay well.

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